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The Asymmetric Reverting Property of Stock Returns

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  • Nam Kiseok

    (University of Texas-Pan American)

Abstract

Using asymmetric nonlinear smooth-transition GARCH(M) models for the period of 1926:01 - 1997:12, this paper shows that monthly excess returns on value-weighted market indexes exhibit a strong asymmetric reverting pattern; a negative return reverts more quickly, with a greater reverting magnitude, to positive returns, than do positive returns revert to negative returns. This paper also reveals that the relationship between future volatility and its risk premium is surprisingly negative when a negative return shock has been realized. The observed asymmetry in return dynamics is directly associated with a reduction in risk premium following a negative return shock. The reduction in risk premium causes not only the current stock price to rise but also the realized negative return to revert faster.

Suggested Citation

  • Nam Kiseok, 2003. "The Asymmetric Reverting Property of Stock Returns," Studies in Nonlinear Dynamics & Econometrics, De Gruyter, vol. 6(4), pages 1-18, March.
    • Handle: RePEc:bpj:sndecm:v:6:y:2003:i:4:n:2
    DOI: 10.2202/1558-3708.1109
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    Cited by:

    1. Srikanta Kundu & Nityananda Sarkar, 2016. "Is the Effect of Risk on Stock Returns Different in Up and Down Markets? A Multi-Country Study," International Econometric Review (IER), Econometric Research Association, vol. 8(2), pages 53-71, September.
    2. Kulp-Tåg, Sofie, 2007. "Short-Horizon Asymmetric Mean-Reversion and Overreactions: Evidence from the Nordic Stock Markets," Working Papers 524, Hanken School of Economics.
    3. Virbickaitė, Audronė & Frey, Christoph & Macedo, Demian N., 2020. "Bayesian sequential stock return prediction through copulas," The Journal of Economic Asymmetries, Elsevier, vol. 22(C).

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