Business Cycle Asymmetries In Stock Returns: Robust Evidence
AbstractIn this study we employ augmented and switching time series models to find possible existence of business cycle asymmetries in U.S. stock returns. Our approach is fully parametric and testing strategy is robust to any conditional heteroskedasticity, and outliers that may be present. We also approximate in sample as well as out-of-sample forecasts from artificial neural networks for testing business cycle nonlinearities in U.S. stock returns. Our results based on nonlinear augmented and switching time series models show a strong evidence of business cycle asymmetries in conditional mean dynamics of U.S. stock returns. These results also show that conditional heteroskedasticity is unimportant when testing for asymmetries in conditional mean. Moreover, the conditional volatility in stock returns is asymmetric and is more pronounced in recessions than in expansion phase of business cycles. Similarly, the results based on neural network models show a statistically significant evidence of business cycle nonlinearities in US stock returns. The magnitude of these nonlinearities is more obvious in post World War II era than in the full sample period.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoArticle provided by Euro-American Association of Economic Development in its journal International Journal of Applied Econometrics and Quantitative Studies .
Volume (Year): 4 (2007)
Issue (Month): 2 ()
Contact details of provider:
Web page: http://www.usc.es/economet/eaa.htm
Find related papers by JEL classification:
- C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models &bull Diffusion Processes
- C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
- G19 - Financial Economics - - General Financial Markets - - - Other
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Francis X. Diebold & Glenn D. Rudebusch, 1988.
"A nonparametric investigation of duration dependence in the American business cycle,"
Working Paper Series / Economic Activity Section
90, Board of Governors of the Federal Reserve System (U.S.).
- Diebold, Francis X & Rudebusch, Glenn D, 1990. "A Nonparametric Investigation of Duration Dependence in the American Business Cycle," Journal of Political Economy, University of Chicago Press, vol. 98(3), pages 596-616, June.
- Liu, Shi-Miin & Brorsen, B Wade, 1995. "Maximum Likelihood Estimation of a Garch-Stable Model," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 10(3), pages 273-85, July-Sept.
- Danielsson, Jon, 1994. "Stochastic volatility in asset prices estimation with simulated maximum likelihood," Journal of Econometrics, Elsevier, vol. 64(1-2), pages 375-400.
- Zhang, Guoqiang & Eddy Patuwo, B. & Y. Hu, Michael, 1998. "Forecasting with artificial neural networks:: The state of the art," International Journal of Forecasting, Elsevier, vol. 14(1), pages 35-62, March.
- Perez-Quiros, G. & Timmermann, A., 2001.
"Business Cycle Asymmetries in Stock Returns: Evidence from Higher Order Moments and Conditional Densities,"
58, Quebec a Montreal - Recherche en gestion.
- Perez-Quiros, Gabriel & Timmermann, Allan, 2001. "Business cycle asymmetries in stock returns: Evidence from higher order moments and conditional densities," Journal of Econometrics, Elsevier, vol. 103(1-2), pages 259-306, July.
- Allan Timmermann & Gabriel Perez-Quiros, 2000. "Business Cycle Asymmetries in Stock Returns: Evidence from Higher Order Moments and Conditional Densities," FMG Discussion Papers dp360, Financial Markets Group.
- Pérez Quirós, Gabriel & Timmermann, Allan, 2001. "Business cycle asymmetries in stock returns: evidence from higher order moments and conditional densities," Working Paper Series 0058, European Central Bank.
- Norwood, F. Bailey & Lusk, Jayson L. & Brorsen, B. Wade, 2004. "Model Selection for Discrete Dependent Variables: Better Statistics for Better Steaks," Journal of Agricultural and Resource Economics, Western Agricultural Economics Association, vol. 29(03), December.
- Khurshid M. Kiani & Prasad V. Bidarkota, 2004.
"On Business Cycle Asymmetries in G7 Countries,"
Oxford Bulletin of Economics and Statistics,
Department of Economics, University of Oxford, vol. 66(3), pages 333-351, 07.
- French, Kenneth R. & Schwert, G. William & Stambaugh, Robert F., 1987. "Expected stock returns and volatility," Journal of Financial Economics, Elsevier, vol. 19(1), pages 3-29, September.
- Simon M. Potter, 1993.
"A Nonlinear Approach to U.S. GNP,"
UCLA Economics Working Papers
693, UCLA Department of Economics.
- Khurshid Kiani, 2005. "Detecting Business Cycle Asymmetries Using Artificial Neural Networks and Time Series Models," Computational Economics, Society for Computational Economics, vol. 26(1), pages 65-89, August.
- Beaudry, Paul & Koop, Gary, 1993. "Do recessions permanently change output?," Journal of Monetary Economics, Elsevier, vol. 31(2), pages 149-163, April.
- Ghose, Devajyoti & Kroner, Kenneth F., 1995. "The relationship between GARCH and symmetric stable processes: Finding the source of fat tails in financial data," Journal of Empirical Finance, Elsevier, vol. 2(3), pages 225-251, September.
- Sowell, Fallaw, 1992. "Maximum likelihood estimation of stationary univariate fractionally integrated time series models," Journal of Econometrics, Elsevier, vol. 53(1-3), pages 165-188.
- Lee, Tae-Hwy & White, Halbert & Granger, Clive W. J., 1993.
"Testing for neglected nonlinearity in time series models : A comparison of neural network methods and alternative tests,"
Journal of Econometrics,
Elsevier, vol. 56(3), pages 269-290, April.
- Tom Doan, . "REGRESET: RATS procedure to perform Ramsey RESET test on regression," Statistical Software Components RTS00181, Boston College Department of Economics.
- Tom Doan, . "REGWHITENNTEST: RATS procedure to perform White neural network test on regression," Statistical Software Components RTS00183, Boston College Department of Economics.
- Gary Koop & Simon M. Potter, 2001.
"Are apparent findings of nonlinearity due to structural instability in economic time series?,"
Royal Economic Society, vol. 4(1), pages 38.
- Gary Koop & Simon M. Potter, 1999. "Are apparent findings of nonlinearity due to structural instability in economic time series?," Staff Reports 59, Federal Reserve Bank of New York.
- Bidarkota Prasad V., 1999. "Sectoral Investigation of Asymmetries in the Conditional Mean Dynamics of the Real U.S. GDP," Studies in Nonlinear Dynamics & Econometrics, De Gruyter, vol. 3(4), pages 1-12, January.
- Khurshid M. Kiani & Prasad V. Bidarkota & Terry L. Kastens, 2005. "Forecast performance of neural networks and business cycle asymmetries," Applied Financial Economics Letters, Taylor and Francis Journals, vol. 1(4), pages 205-210, July.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (M. Carmen Guisan).
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.