Asymmetries in Stock Returns: Statistical Tests and Economic Evaluation

By Yongmiao Hong, Jun Tu, Guofu Zhou. 2007

426 citations recorded by the source corpus.

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.

Subfields: Economics and Econometrics, Finance

View Paper: https://www.semanticscholar.org/paper/86ac34b13f3eb1fc24af9ede5d6b538296fe4b20

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Citations in the corpus

Improved Estimates of Higher-Order Comoments and Implications for Portfolio Selection (2010, methodology): “Under relatively weak assumptions regarding the shape of the utility function, Horvath and Scott (1980) and Kimball (1993) show that typical investors exhibit non trivial preferences with respect to portfolio higher-order moments, in addition to mean and variance. In particular, it has been shown th”
A new approach to modeling co-movement of international equity markets: evidence of unconditional copula-based simulation of tail dependence (2009, methodology): “Once a suitable smoothing parameter p is selected, the test statistics of the symmetry test has an asymptotic χ2 distribution with m degrees of freedom (Hong et al. 2007).”
Portfolio optimization in the presence of dependent financial returns with long memory: A copula based approach. (2013, background): “Furthermore, several authors find evidence of asymmetry in the dependence between stock market returns (Longin and Solnik, 2001; Ang and Bekaert, 2002; Ang and Chen, 2002; Das and Uppal, 2004; Patton, 2004; Hong et al., 2007) and between exchange rate returns (Beine, 2004; Li, 2011).”
A review of copula models for economic time series (2012, background): “[93] consider an investment decision involving eleven equity portfolios under ‘‘disappointment aversion’’ preferences; Christoffersen and Langlois [36] consider portfolio decisions involving four common equity market factors; and Garcia and Tsafack [63] consider portfolio decisions involving stocks ”
Generalized Measures of Correlation for Asymmetry, Nonlinearity, and Beyond (2012, positive): “In fact, studying the asymmetric dependent characteristics of random variables has drawn more and more attention, especially the studies of stock returns such as those by Zhang and Shinki (2006) and the Hong, Tu, and Zhou (2007), and the references therein.”
Copulas in Econometrics (2014, background): “Applications of copula-based models to consider portfolio decisions are presented by Patton (2004), Hong et al. (2007), Garcia & Tsafack (2011), and Christoffersen et al. (2012).”