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Modelling nonlinearities in equity returns: the mean impact curve analysis

Modelling nonlinearities in equity returns: the mean impact curve analysis Abstract A time-varying model of equity returns consisting of a volatility factor with time-varying loading, is specified to investigate the dynamical effects of shocks on expected returns. The proposed specification yields a nonlinear relationship between the conditional mean and the news, referred to as the mean impact curve (MIC). Applying this framework to the AORD, Hang Seng and Straits Times equity indexes yields estimated MICs with qualitatively similar nonlinear characteristics for each equity market. An important implication of the empirical results is that the relationship between the conditional mean and the news is found to be dependent upon the size of the shock, a result which is consistent with equity markets displaying mean aversion over short horizons and mean reversion over long horizons. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Studies in Nonlinear Dynamics & Econometrics de Gruyter

Modelling nonlinearities in equity returns: the mean impact curve analysis

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Publisher
de Gruyter
Copyright
Copyright © 2014 by the
ISSN
1081-1826
eISSN
1558-3708
DOI
10.1515/snde-2012-0030
Publisher site
See Article on Publisher Site

Abstract

Abstract A time-varying model of equity returns consisting of a volatility factor with time-varying loading, is specified to investigate the dynamical effects of shocks on expected returns. The proposed specification yields a nonlinear relationship between the conditional mean and the news, referred to as the mean impact curve (MIC). Applying this framework to the AORD, Hang Seng and Straits Times equity indexes yields estimated MICs with qualitatively similar nonlinear characteristics for each equity market. An important implication of the empirical results is that the relationship between the conditional mean and the news is found to be dependent upon the size of the shock, a result which is consistent with equity markets displaying mean aversion over short horizons and mean reversion over long horizons.

Journal

Studies in Nonlinear Dynamics & Econometrics – de Gruyter

Published: Feb 1, 2014

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    Blake
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    Glosten
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    Ghysels
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    Teräsvirta
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    Bollerslev
  • Nonlinear Pricing Kernels Kurtosis Preference and Evidence from the Cross Section of Equity Returns of
    Dittmar
  • Asymmetric Mean Reversion Profits GARCH Approach of Empirical
    Nam
  • The Zero Information - Limit Condition and Spurious Inference in Weakly Identified Models of
    Nelson
  • Non - Linear Models : Where Do We Go Next - Time Varying Parameter Models ? Studies in Nonlinear
    Granger
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    Choe
  • Testing for ARCH in the Presence of Nonlinearity of Unknown Form in the Conditional Mean of
    Blake
  • Bali Nonlinear Mean Reversion in Stock Prices of Banking and
    Demirtas
  • Mean Reversion and the Distribution of United Kingdom Stock Index Returns of Accounting
    Ashton
  • Measuring Fund Strategy and Performance in Changing Economic Conditions of
    Ferson
  • Pure Significance Tests of the Unit Root Hypothesis Against Nonlinear
    Blake
  • Momentum and Mean Reversion Across National Equity Markets of Empirical
    Balvers
  • Spurious Inference in the GARCH Model when It is Weakly Identified Studies in Nonlinear Article
    Ma
  • Conditional Heteroskedastic Model for Speculative Prices and Rates of Return The of and
    Bollerslev
  • No News is Good News : An Asymmetric Model of Changing Volatility in Stock Returns of
    Campbell
  • Resurrecting the Cross - Sectional Test when Risk Premia are Time - Varying of
    Lettau
  • Santa - Clara There is a Risk - Return Tradeoff After All of
    Ghysels
  • Testing Linearity Against Smooth Transition Autoregressive Models
    Luukkonen
  • Fund Risk Dynamics Implications for Performance Appraisal of
    Bollen
  • Mean Reversion Across National Stock Markets and Parametric Contrarian Investment Strategies of
    Balvers
  • Modelling Nonlinear Economic Time Series New York University
    Teräsvirta
  • Resurrecting the Cross - Sectional Test when Risk Premia are Time - Varying of
    Lettau
  • Can Hedge Funds Time Market Liquidity ? Unpublised working paper University of Massachusetts at
    Cao
  • Pure Significance Tests of the Unit Root Hypothesis Against Nonlinear
    Blake
  • Time - Varying Betas Help in Asset Pricing : The Threshold Studies in Nonlinear
    Levent
  • Mean Reversion and the Distribution of United Kingdom Stock Index Returns of Accounting
    Ashton
  • New Class of Tests of Contagion with Applications of
    Fry
  • Mean Reversion Across National Stock Markets and Parametric Contrarian Investment Strategies of
    Balvers
  • Impulse Response Analysis in Nonlinear Multivariate Models of
    Koop
  • Hol Uspensky The Stochastic Volatility in Mean Model : Empirical Evidence from International Stock Markets of
    Koopman
  • Estimating the Dynamics of Mutual Fund Alphas and Betas of
    Mamaysky
  • Non - Linear Models : Where Do We Go Next - Time Varying Parameter Models ? Studies in Nonlinear
    Granger
  • On the High - Frequency Dynamics of Hedge Fund Risk Exposures of
    Patton
  • Conditional Heteroskedastic Model for Speculative Prices and Rates of Return The of and
    Bollerslev
  • On the Relation between the Expected Value and the Volatility of the Nominal Excess Return on Stocks of
    Glosten
  • No News is Good News : An Asymmetric Model of Changing Volatility in Stock Returns of
    Campbell
  • Conditional Skewness in Asset Pricing Tests The of
    Harvey
  • Fund Risk Dynamics Implications for Performance Appraisal of
    Bollen
  • An Intertemporal Capital Asset Pricing Model
    Merton
  • Momentum and Mean Reversion Across National Equity Markets of Empirical
    Balvers
  • Lilien Estimating Time Varying Risk Premia in the Term Structure The model
    Engle
  • Measuring and Testing the Impact of News on Volatility of
    Engle
  • Mean Reversion in Stock Prices of the Empirical Evidence of
    Kim
  • Can Hedge Funds Time Market Liquidity ? Unpublised working paper University of Massachusetts at
    Cao
  • Measuring and Testing the Impact of News on Volatility of
    Engle
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    Bansal
  • Nonlinear Impulse Response Functions of and
    Potter
  • New Class of Tests of Contagion with Applications of
    Fry
  • No Arbitrage Arbitrage Pricing New Approach of
    Bansal
  • Test for Independence Based on the Correlation
    Brock
  • Mean Reversion in Stock Prices of the Empirical Evidence of
    Kim
  • Conditional Heteroskedasticity in Asset Returns New Approach
    Nelson
  • Estimating the Dynamics of Mutual Fund Alphas and Betas of
    Mamaysky