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Short-Horizon Asymmetric Mean-Reversion and Overreactions: Evidence from the Nordic Stock Markets

  • Kulp-Tåg, Sofie

    ()

    (Swedish School of Economics and Business Administration)

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    This paper examines the asymmetric behavior of conditional mean and variance. Short-horizon mean-reversion behavior in mean is modeled with an asymmetric nonlinear autoregressive model, and the variance is modeled with an Exponential GARCH in Mean model. The results of the empirical investigation of the Nordic stock markets indicates that negative returns revert faster to positive returns when positive returns generally persist longer. Asymmetry in both mean and variance can be seen on all included markets and are fairly similar. Volatility rises following negative returns more than following positive returns which is an indication of overreactions. Negative returns lead to increased variance and positive returns leads even to decreased variance.

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    File URL: http://brunnen.shh.fi/portals/pubmanager/pdf/524-978-951-555-951-7.pdf
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    Paper provided by Hanken School of Economics in its series Working Papers with number 524.

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    Length: 25 pages
    Date of creation: 02 Apr 2007
    Date of revision:
    Handle: RePEc:hhb:hanken:0524
    Contact details of provider: Postal: Hanken School of Economics, Arkadiankatu 22, P.O.B. 479; FIN 00101 Helsinki, Finland
    Phone: +358-9-431 331
    Fax: +358-9-431 33 333
    Web page: http://www.hanken.fi

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    14. Bollerslev, Tim & Chou, Ray Y. & Kroner, Kenneth F., 1992. "ARCH modeling in finance : A review of the theory and empirical evidence," Journal of Econometrics, Elsevier, vol. 52(1-2), pages 5-59.
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