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A nonlinear model of asset returns with multiple shocks

Author

Listed:
  • Kahra Hannu

    (Oulu Business School, Oulu University, Oulu, Finland)

  • Martin Vance L.

    (Economics Department, University of Melbourne, Victoria, Australia)

  • Sarkar Saikat

    (Department of Commerce, Mount Allison University, 65 York Street, Sackville, NB-E4L1E4, Canada, Phone: 647-606-1278)

Abstract

A nonlinear model of asset returns allowing for multiple shocks is specified. The nonlinear features of the model are demonstrated graphically using a 3-dimensional diagram referred to as the mean impact surface. A new class of nonlinearity tests is also developed which is compared with existing testing methodologies. Applying the framework using excess returns on US and world equities the empirical results provide strong statistical evidence that domestic and foreign shocks have nonlinear effects on expected returns in the US with the effects being determined by the sign and the size of shocks. In contrast, the effects on world expected returns from shocks in the US and the world are found to react more smoothly. The empirical nonlinearities identified are also shown to be robust to alternative choices of risk factors and distributional assumptions.

Suggested Citation

  • Kahra Hannu & Martin Vance L. & Sarkar Saikat, 2019. "A nonlinear model of asset returns with multiple shocks," Studies in Nonlinear Dynamics & Econometrics, De Gruyter, vol. 23(1), pages 1-44, February.
    • Handle: RePEc:bpj:sndecm:v:23:y:2019:i:1:p:44:n:5
    DOI: 10.1515/snde-2017-0064
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    More about this item

    Keywords

    multivariate mean impact surface; shock spillovers; testing;
    All these keywords.

    JEL classification:

    • C12 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Hypothesis Testing: General
    • C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation
    • C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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