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Asymmetric Covariance, Volatility, And The Effect Of News

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  • Warren G. Dean
  • Robert W. Faff

Abstract

We propose that covariance (rather than beta) asymmetry provides a superior framework for examining issues related to changing risk premiums. Accordingly, we investigate whether the conditional covariance between stock and market returns is asymmetric in response to good and bad news. Our model of conditional covariance accommodates both the sign and magnitude of return innovations, and we find significant covariance asymmetry that can explain, at least in part, the volatility feedback of stock returns. Our findings are consistent across firm size, firm leverage, and temporal and cross‐sectional aggregations.

Suggested Citation

  • Warren G. Dean & Robert W. Faff, 2004. "Asymmetric Covariance, Volatility, And The Effect Of News," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 27(3), pages 393-413, September.
    • Handle: RePEc:bla:jfnres:v:27:y:2004:i:3:p:393-413
    DOI: 10.1111/j.1475-6803.2004.00097.x
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    References listed on IDEAS

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    1. 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.
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    1. Mazzotta, Stefano, 2008. "How important is asymmetric covariance for the risk premium of international assets?," Journal of Banking & Finance, Elsevier, vol. 32(8), pages 1636-1647, August.

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