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Is there a symmetric nonlinear causal relationship between large and small firms?

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  • Francis, Bill B.
  • Mougoué, Mbodja
  • Panchenko, Valentyn

Abstract

This paper uses both linear and nonlinear causality tests to reexamine the causal relationship between the returns on large and small firms. Consistent with previous results, we find that large firms linearly lead small firms. We also find a significant linear causality in the direction from small firms to large firms, particularly in the more recent time period where the impact from small firms to large firms is greater than from large to small. More important, in contrast to the received literature, we find significant nonlinear causality that is bi-directional and of the same duration in either direction. Using the BEKK asymmetric GARCH model we are able to capture most of the detected nonlinear relationship. This indicates that volatility spillovers are largely responsible for the observed nonlinear Granger causality.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Empirical Finance.

Volume (Year): 17 (2010)
Issue (Month): 1 (January)
Pages: 23-38

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Handle: RePEc:eee:empfin:v:17:y:2010:i:1:p:23-38

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Web page: http://www.elsevier.com/locate/jempfin

Related research

Keywords: Linear causality Nonlinear causality BEKK asymmetric GARCH Small firms Large firms;

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Cited by:
  1. Dergiades, Theologos, 2012. "Do investors’ sentiment dynamics affect stock returns? Evidence from the US economy," Economics Letters, Elsevier, vol. 116(3), pages 404-407.
  2. Dergiades, Theologos & Madlener, Reinhard & Christofidou, Georgia, 2012. "The Nexus between Natural Gas Spot and Futures Prices at NYMEX: Do Weather Shocks and Non-Linear Causality in Low Frequencies Matter?," FCN Working Papers 17/2012, E.ON Energy Research Center, Future Energy Consumer Needs and Behavior (FCN), revised Sep 2013.
  3. Wolski, M., 2013. "Exploring Nonlinearities in Financial Systemic Risk," CeNDEF Working Papers 13-14, Universiteit van Amsterdam, Center for Nonlinear Dynamics in Economics and Finance.

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