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HACking at Non-linearity: Evidence from Stocks and Bonds

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Author Info
Robert J Bianchi () (School of Economics and Finance, Queensland University of Technology)
Adam E Clements () (School of Economics and Finance, Queensland University of Technology)
Michael E Drew

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Abstract

The implicit assumption of linearity is an important element in empirical finance. This study presents a hypothesis testing approach which examines the linear behaviour of the conditional mean between stock and bond returns. Conventional tests detect spurious non-linearity in the conditional mean caused by heteroskedasticity and/or autocorrelation. This study re-states these tests in a heteroskedasticity and autocorrelation consistent (HAC) framework and we find that stock and bond returns are indeed linear-in-the-mean in both univariate and bivariate settings. This study contends that previous research may have detected spurious non-linearity due to size distortions caused by heteroskedasticity and autocorrelation, rather than the presence of genuine non-linearity.

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File URL: http://www.bus.qut.edu.au/faculty/schools/economics/documents/discussionPapers/2009/244Bianchi.pdf
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Publisher Info
Paper provided by School of Economics and Finance, Queensland University of Technology in its series School of Economics and Finance Discussion Papers and Working Papers Series with number 244.

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Length: 48 pages
Date of creation: 27 Jan 2009
Date of revision:
Handle: RePEc:qut:dpaper:244

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Related research
Keywords: linearity; nonlinear; heteroskedasticity-robust tests; autocorrelation-robust tests;

Find related papers by JEL classification:
G00 - Financial Economics - - General - - - General
G12 - Financial Economics - - General Financial Markets - - - Asset Pricing
G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies

References listed on IDEAS
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    Other versions:
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