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Time Variation And Asymmetry In The World Price Of Covariance Risk: The Implications For International Diversification

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Author Info

  • Olan T. Henry
  • Nilss Olekalns
  • Kalvinder Shields

Abstract

The International Capital Asset Pricing Model measures country risk in terms of the conditional covariance of national returns with the world return. Using impulse responses from a multivariate nonlinear model we provide evidence of time variation and asymmetry in the measure of country risk. and the implied benefit to international diversification. The evidence implies that the price of risk and the benefits from diversification may differ in a statistically and economically meaningful fashion across bull and bear markets.

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File URL: http://www.economics.unimelb.edu.au/downloads/wpapers-04/907.pdf
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Bibliographic Info

Paper provided by The University of Melbourne in its series Department of Economics - Working Papers Series with number 907.

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Length: 36 pages
Date of creation: 2004
Date of revision:
Handle: RePEc:mlb:wpaper:907

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Postal: Department of Economics, The University of Melbourne, 5th Floor, Economics and Commerce Building, Victoria, 3010, Australia
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Fax: +61 3 8344 6899
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Web page: http://www.economics.unimelb.edu.au
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Related research

Keywords: Generalised Impulse Responses; Asymmetry; International Capital Asset Pricing Model.;

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References

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  1. Shields, KalvInder & Kevin B Grier & Olan T Henry & Nilss Olekalns, 2003. "The Asymmetric Effects of Uncertainty on Inflation and Output Growth," Royal Economic Society Annual Conference 2003 187, Royal Economic Society.
  2. Karolyi, G Andrew & Stulz, Rene M, 1996. " Why Do Markets Move Together? An Investigation of U.S.-Japan Stock Return Comovements," Journal of Finance, American Finance Association, vol. 51(3), pages 951-86, July.
  3. Engle, Robert F & Ng, Victor K, 1993. " Measuring and Testing the Impact of News on Volatility," Journal of Finance, American Finance Association, vol. 48(5), pages 1749-78, December.
  4. John Y. Campbell & Ludger Hentschel, 1991. "No News is Good News: An Asymmetric Model of Changing Volatility in Stock Returns," NBER Working Papers 3742, National Bureau of Economic Research, Inc.
  5. Brooks, Chris & Henry, Olan T., 2000. "Linear and non-linear transmission of equity return volatility: evidence from the US, Japan and Australia," Economic Modelling, Elsevier, vol. 17(4), pages 497-513, December.
  6. Attanasio, Orazio P, 1991. "Risk, Time-Varying Second Moments and Market Efficiency," Review of Economic Studies, Wiley Blackwell, vol. 58(3), pages 479-94, May.
  7. Stulz, ReneM., 1981. "A model of international asset pricing," Journal of Financial Economics, Elsevier, vol. 9(4), pages 383-406, December.
  8. Bera, Anil K. & Jarque, Carlos M., 1982. "Model specification tests : A simultaneous approach," Journal of Econometrics, Elsevier, vol. 20(1), pages 59-82, October.
  9. Kristin J. Forbes & Roberto Rigobon, 2002. "No Contagion, Only Interdependence: Measuring Stock Market Comovements," Journal of Finance, American Finance Association, vol. 57(5), pages 2223-2261, October.
  10. Young-Hye Cho & Robert F. Engle, 1999. "Time-Varying Betas and Asymmetric Effect of News: Empirical Analysis of Blue Chip Stocks," NBER Working Papers 7330, National Bureau of Economic Research, Inc.
  11. van Dijk, D.J.C. & Franses, Ph.H.B.F. & Boswijk, H.P., 2000. "Asymmetric and common absorption of shocks in nonlinear autoregressive models," Econometric Institute Research Papers EI 2000-01/A, Erasmus University Rotterdam, Erasmus School of Economics (ESE), Econometric Institute.
  12. HAFNER, Christian & HERWARTZ, Helmut, 2001. "Volatility impulse response functions for multivariate GARCH models," CORE Discussion Papers 2001039, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  13. Geert Bekaert & Campbell R. Harvey, 2003. "Market Integration and Contagion," NBER Working Papers 9510, National Bureau of Economic Research, Inc.
  14. Engle, Robert F, 1982. "Autoregressive Conditional Heteroscedasticity with Estimates of the Variance of United Kingdom Inflation," Econometrica, Econometric Society, vol. 50(4), pages 987-1007, July.
  15. Gonzalez-Rivera, Gloria, 1996. "Time-varying risk The case of the American computer industry," Journal of Empirical Finance, Elsevier, vol. 2(4), pages 333-342, February.
  16. Bekaert, Geert & Harvey, Campbell R., 1997. "Emerging equity market volatility," Journal of Financial Economics, Elsevier, vol. 43(1), pages 29-77, January.
  17. John M. Griffin & G. Andrew Karolyi, . "Another Look at the Role of the Industrial Structure of Markets for International Diversification Strategies," Research in Financial Economics 9608, Ohio State University.
  18. Alberto Giovannini & Philippe Jorion, 1989. "The Time-Variation of Risk and Return in the Foreign Exchange and Stock Markets," NBER Working Papers 2573, National Bureau of Economic Research, Inc.
  19. K.C. Chan & G. Andrew Karolyi & Rene M. Stulz, 1992. "Global Financial Markets and the Risk Premium on U.S. Equity," NBER Working Papers 4074, National Bureau of Economic Research, Inc.
  20. Bollerslev, Tim & Engle, Robert F & Wooldridge, Jeffrey M, 1988. "A Capital Asset Pricing Model with Time-Varying Covariances," Journal of Political Economy, University of Chicago Press, vol. 96(1), pages 116-31, February.
  21. Braun, Phillip A & Nelson, Daniel B & Sunier, Alain M, 1995. " Good News, Bad News, Volatility, and Betas," Journal of Finance, American Finance Association, vol. 50(5), pages 1575-1603, December.
  22. Lin, Wen-Ling & Engle, Robert F & Ito, Takatoshi, 1994. "Do Bulls and Bears Move across Borders? International Transmission of Stock Returns and Volatility," Review of Financial Studies, Society for Financial Studies, vol. 7(3), pages 507-38.
  23. Harvey, Campbell R, 1991. " The World Price of Covariance Risk," Journal of Finance, American Finance Association, vol. 46(1), pages 111-57, March.
  24. Adler, Michael & Dumas, Bernard, 1983. " International Portfolio Choice and Corporation Finance: A Synthesis," Journal of Finance, American Finance Association, vol. 38(3), pages 925-84, June.
  25. Koop, Gary & Pesaran, M. Hashem & Potter, Simon M., 1996. "Impulse response analysis in nonlinear multivariate models," Journal of Econometrics, Elsevier, vol. 74(1), pages 119-147, September.
  26. Chang, Eric & Eun, Cheol S. & Kolodny, Richard, 1995. "International diversification through closed-end country funds," Journal of Banking & Finance, Elsevier, vol. 19(7), pages 1237-1263, October.
  27. Kalvinder Shields & Nilss Olekalns & Ãlan T. Henry & Chris Brooks, 2005. "Measuring the Response of Macroeconomic Uncertainty to Shocks," The Review of Economics and Statistics, MIT Press, vol. 87(2), pages 362-370, May.
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