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The asymmetric reactions of mean and volatility of stock returns to domestic and international information based on a four-regime double-threshold GARCH model

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  • Chen, Cathy W.S.
  • Yang, Ming Jing
  • Gerlach, Richard
  • Jim Lo, H.

Abstract

In this paper, we investigate the asymmetric reactions of mean and volatility of stock returns in five major markets to their own local news and the US information via linear and nonlinear models. We introduce a four-regime Double-Threshold GARCH (DTGARCH) model, which allows asymmetry in both the conditional mean and variance equations simultaneously by employing two threshold variables, to analyze the stock markets’ reactions to different types of information (good/bad news) generated from the domestic markets and the US stock market. By applying the four-regime DTGARCH model, this study finds that the interaction between the information of domestic and US stock markets leads to the asymmetric reactions of stock returns and their variability. In addition, this research also finds that the positive autocorrelation reported in the previous studies of financial markets may in fact be mis-specified, and actually due to the local market's positive response to the US stock market.

Suggested Citation

  • Chen, Cathy W.S. & Yang, Ming Jing & Gerlach, Richard & Jim Lo, H., 2006. "The asymmetric reactions of mean and volatility of stock returns to domestic and international information based on a four-regime double-threshold GARCH model," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 366(C), pages 401-418.
  • Handle: RePEc:eee:phsmap:v:366:y:2006:i:c:p:401-418
    DOI: 10.1016/j.physa.2005.10.021
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    References listed on IDEAS

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    Cited by:

    1. Yang, Yung-Lieh & Chang, Chia-Lin, 2008. "A double-threshold GARCH model of stock market and currency shocks on stock returns," Mathematics and Computers in Simulation (MATCOM), Elsevier, vol. 79(3), pages 458-474.
    2. Kang, Sang Hoon & Cheong, Chongcheul & Yoon, Seong-Min, 2011. "Structural changes and volatility transmission in crude oil markets," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 390(23), pages 4317-4324.
    3. Piotr Wdowinski & Marta Malecka, 2010. "Asymmetry in Volatility: A Comparison of Developed and Transition Stock Markets," CESifo Working Paper Series 2974, CESifo Group Munich.
    4. Liu, Hsiang-Hsi & Chuang, Wen-I & Huang, Jih-Jeng & Chen, Yu-Hao, 2016. "The overconfident trading behavior of individual versus institutional investors," International Review of Economics & Finance, Elsevier, vol. 45(C), pages 518-539.
    5. Lahmiri, Salim, 2017. "Asymmetric and persistent responses in price volatility of fertilizers through stable and unstable periods," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 466(C), pages 405-414.
    6. Wei, Yu, 2012. "Forecasting volatility of fuel oil futures in China: GARCH-type, SV or realized volatility models?," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 391(22), pages 5546-5556.

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