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Asymmetries in Stock Returns: Statistical Tests and Economic Evaluation

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  • Yongmiao Hong
  • Jun Tu
  • Guofu Zhou

Abstract

We provide a model-free test for asymmetric correlations in which stocks move more often with the market when the market goes down than when it goes up, and also provide such tests for asymmetric betas and covariances. When stocks are sorted by size, book-to-market, and momentum, we find strong evidence of asymmetries for both size and momentum portfolios, but no evidence for book-to-market portfolios. Moreover, we evaluate the economic significance of incorporating asymmetries into investment decisions, and find that they can be of substantial economic importance for an investor with a disappointment aversion (DA) preference as described by Ang, Bekaert, and Liu (2005). , Oxford University Press.
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Suggested Citation

  • Yongmiao Hong & Jun Tu & Guofu Zhou, 2013. "Asymmetries in Stock Returns: Statistical Tests and Economic Evaluation," WISE Working Papers 2013-10-14, Wang Yanan Institute for Studies in Economics (WISE), Xiamen University.
  • Handle: RePEc:wyi:wpaper:001962
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    References listed on IDEAS

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    1. Shlomo Benartzi & Richard H. Thaler, 1995. "Myopic Loss Aversion and the Equity Premium Puzzle," The Quarterly Journal of Economics, Oxford University Press, vol. 110(1), pages 73-92.
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    4. Kandel, Shmuel & Stambaugh, Robert F, 1996. " On the Predictability of Stock Returns: An Asset-Allocation Perspective," Journal of Finance, American Finance Association, vol. 51(2), pages 385-424, June.
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    6. Yacine Aït-Sahalia, 2001. "Variable Selection for Portfolio Choice," Journal of Finance, American Finance Association, vol. 56(4), pages 1297-1351, August.
    7. Pastor, Lubos & Stambaugh, Robert F., 2000. "Comparing asset pricing models: an investment perspective," Journal of Financial Economics, Elsevier, vol. 56(3), pages 335-381, June.
    8. Bekaert, Geert & Wu, Guojun, 2000. "Asymmetric Volatility and Risk in Equity Markets," Review of Financial Studies, Society for Financial Studies, vol. 13(1), pages 1-42.
    9. Schwert, G William, 1989. " Why Does Stock Market Volatility Change over Time?," Journal of Finance, American Finance Association, vol. 44(5), pages 1115-1153, December.
    10. Ang, Andrew & Bekaert, Geert & Liu, Jun, 2005. "Why stocks may disappoint," Journal of Financial Economics, Elsevier, vol. 76(3), pages 471-508, June.
    11. Banz, Rolf W & Breen, William J, 1986. " Sample-Dependent Results Using Accounting and Market Data: Some Evidence," Journal of Finance, American Finance Association, vol. 41(4), pages 779-793, September.
    12. Tu, Jun & Zhou, Guofu, 2004. "Data-generating process uncertainty: What difference does it make in portfolio decisions?," Journal of Financial Economics, Elsevier, vol. 72(2), pages 385-421, May.
    13. Conrad, Jennifer & Gultekin, Mustafa N & Kaul, Gautam, 1991. "Asymmetric Predictability of Conditional Variances," Review of Financial Studies, Society for Financial Studies, vol. 4(4), pages 597-622.
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    Cited by:

    1. Lieven Baele & Koen Inghelbrecht, 2005. "Structural versus Temporary Drivers of Country and Industry Risk," International Finance 0511005, EconWPA.
    2. Jaehun Chung & Yongmiao Hong, 2007. "Model-free evaluation of directional predictability in foreign exchange markets," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 22(5), pages 855-889.
    3. Hsu, Chih-Chiang & Yau, Ruey & Wu, Jyun-Yi, 2009. "Asymmetric Exchange Rate Exposure and Industry Characteristics : Evidence from Japanese Data," Hitotsubashi Journal of Economics, Hitotsubashi University, vol. 50(1), pages 57-69, June.
    4. repec:ipg:wpaper:2014-545 is not listed on IDEAS
    5. Westner, Günther & Madlener, Reinhard, 2012. "Investment in new power generation under uncertainty: Benefits of CHP vs. condensing plants in a copula-based analysis," Energy Economics, Elsevier, vol. 34(1), pages 31-44.
    6. Dahlquist, Magnus & Farago, Adam & Tédongap, Roméo, 2015. "Asymmetries and Portfolio Choice," CEPR Discussion Papers 10706, C.E.P.R. Discussion Papers.
    7. Nguyen, Duc Khuong & Sousa, Ricardo M. & Uddin, Gazi Salah, 2015. "Testing for asymmetric causality between U.S. equity returns and commodity futures returns," Finance Research Letters, Elsevier, vol. 12(C), pages 38-47.

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