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Asymmetries in conditional mean and variance: modelling stock returns by asMA-asQGARCH

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Author Info
Jan G. De Gooijer (University of Amsterdam, The Netherlands)
Kurt Brännäs (Umeå University, Sweden)

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Abstract

We propose a nonlinear time series model where both the conditional mean and the conditional variance are asymmetric functions of past information. The model is particularly useful for analysing financial time series where it has been noted that there is an asymmetric impact of good news and bad news on volatility (risk) transmission. We introduce a coherent framework for testing asymmetries in the conditional mean and the conditional variance, separately or jointly. To this end we derive both a Wald and a Lagrange multiplier test. Some of the new asymmetric model's moment properties are investigated. Detailed empirical results are given for the daily returns of the composite index of the New York Stock Exchange. There is strong evidence of asymmetry in both the conditional mean and the conditional variance functions. In a genuine out-of-sample forecasting experiment the performance of the best fitted asymmetric model, having asymmetries in both conditional mean and conditional variance, is compared with an asymmetric model for the conditional mean, and with no-change forecasts. This is done both in terms of conditional mean forecasting as well as in terms of risk forecasting. Finally, the paper presents some evidence of asymmetries in the index stock returns of the Group of Seven (G7) industrialized countries. Copyright © 2004 John Wiley & Sons, Ltd.

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File URL: http://hdl.handle.net/10.1002/for.910
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Article provided by John Wiley & Sons, Ltd. in its journal Journal of Forecasting.

Volume (Year): 23 (2004)
Issue (Month): 3 ()
Pages: 155-171
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Handle: RePEc:jof:jforec:v:23:y:2004:i:3:p:155-171

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Web page: http://www3.interscience.wiley.com/cgi-bin/jhome/2966

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References listed on IDEAS
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.:
  1. Li, C W & Li, W K, 1996. "On a Double-Threshold Autoregressive Heteroscedastic Time Series Model," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 11(3), pages 253-74, May-June. [Downloadable!] (restricted)
  2. Lawrence R. Glosten & Ravi Jagannathan & David E. Runkle, 1993. "On the relation between the expected value and the volatility of the nominal excess return on stocks," Staff Report 157, Federal Reserve Bank of Minneapolis. [Downloadable!]
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  3. Pagan, Adrian, 1996. "The econometrics of financial markets," Journal of Empirical Finance, Elsevier, vol. 3(1), pages 15-102, May. [Downloadable!] (restricted)
  4. Sentana,E., 1995. "Quadratic Arch Models," Papers 9517, Centro de Estudios Monetarios Y Financieros-.
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(explanations, 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.)

  1. Kulp-Tåg, Sofie, 2007. "Short-Horizon Asymmetric Mean-Reversion and Overreactions: Evidence from the Nordic Stock Markets," Working Papers 524, Swedish School of Economics and Business Administration. [Downloadable!]
  2. Brännäs, Kurt & Soultanaeva, Albina, 2006. "Influence of News in Moscow and New York on Returns and Risks on Baltic State Stock Indices," UmeÃ¥ Economic Studies 696, Umeå University, Department of Economics. [Downloadable!]
  3. Brännäs, Kurt, 2003. "Temporal Aggregation of the Returns of a Stock Index Series," UmeÃ¥ Economic Studies 614, Umeå University, Department of Economics. [Downloadable!]
  4. Malmsten, Hans & Teräsvirta, Timo, 2004. "Stylized Facts of Financial Time Series and Three Popular Models of Volatility," Working Paper Series in Economics and Finance 563, Stockholm School of Economics, revised 03 Sep 2004. [Downloadable!]
  5. Kurt Braennaes & Niklas Nordman, 2001. "An Alternative Conditional Asymmetry Specification for Stock Returns," CESifo Working Paper Series CESifo Working Paper No. , CESifo GmbH. [Downloadable!]
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  6. Kurt Brännäs & Niklas Nordman, 2003. "Conditional skewness modelling for stock returns," Applied Economics Letters, Taylor and Francis Journals, vol. 10(11), pages 725-728, September. [Downloadable!] (restricted)
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