Is the Effect of Risk on Stock Returns Different in Up and Down Markets? A Multi-Country Study
Several empirical studies in finance have examined whether or not the risk associated with any stock market responds differently in two different states of the stock market, especially in bull and bear markets. This paper studies this problem through a model where (i) the conditional mean specifi...
| Main Authors: | , |
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| Format: | Article |
| Language: | English |
| Published: |
Econometric Research Association
2016-09-01
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| Series: | International Econometric Review |
| Subjects: | |
| Online Access: | http://www.era.org.tr/makaleler/24110112.pdf |
| _version_ | 1797917537270235136 |
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| author | Srikanta Kundu Nityananda Sarkar |
| author_facet | Srikanta Kundu Nityananda Sarkar |
| author_sort | Srikanta Kundu |
| collection | DOAJ |
| description | Several empirical studies in finance have examined whether or not the risk associated
with any stock market responds differently in two different states of the stock market,
especially in bull and bear markets. This paper studies this problem through a model
where (i) the conditional mean specification considers the threshold autoregressive model
for two market situations characterized as up and down markets, (ii) the conditional
variance specification is asymmetric in the sense of capturing leverage effect, and (iii) the
conditional variance directly affects the conditional mean through the risk premium term
in the risk-return relationship. Using daily returns on stock indices of eight countries,
comprising four developed countries - the USA, the UK, Hong Kong, and Japan - and
four important emerging economies, called the BRIC group, we have found that the
nature of risk-return relationship is different in up and down markets. Furthermore, the
risk aversion parameter is positive in the down markets and negative in the up markets.
This finding supports the hypothesis that investors require a premium for taking downside
risk and pay a premium for upside variation. Finally, the findings suggest that the nature
of risk-return relationship is same for the two groups of countries. |
| first_indexed | 2024-04-10T13:14:41Z |
| format | Article |
| id | doaj.art-6edc779bf00c4c6dba84f7c63750a97c |
| institution | Directory Open Access Journal |
| issn | 1308-8793 1308-8815 |
| language | English |
| last_indexed | 2024-04-10T13:14:41Z |
| publishDate | 2016-09-01 |
| publisher | Econometric Research Association |
| record_format | Article |
| series | International Econometric Review |
| spelling | doaj.art-6edc779bf00c4c6dba84f7c63750a97c2023-02-15T16:12:27ZengEconometric Research AssociationInternational Econometric Review1308-87931308-88152016-09-01825371Is the Effect of Risk on Stock Returns Different in Up and Down Markets? A Multi-Country StudySrikanta Kundu0Nityananda Sarkar1Centre for Development StudiesIndian Statistical InstituteSeveral empirical studies in finance have examined whether or not the risk associated with any stock market responds differently in two different states of the stock market, especially in bull and bear markets. This paper studies this problem through a model where (i) the conditional mean specification considers the threshold autoregressive model for two market situations characterized as up and down markets, (ii) the conditional variance specification is asymmetric in the sense of capturing leverage effect, and (iii) the conditional variance directly affects the conditional mean through the risk premium term in the risk-return relationship. Using daily returns on stock indices of eight countries, comprising four developed countries - the USA, the UK, Hong Kong, and Japan - and four important emerging economies, called the BRIC group, we have found that the nature of risk-return relationship is different in up and down markets. Furthermore, the risk aversion parameter is positive in the down markets and negative in the up markets. This finding supports the hypothesis that investors require a premium for taking downside risk and pay a premium for upside variation. Finally, the findings suggest that the nature of risk-return relationship is same for the two groups of countries.http://www.era.org.tr/makaleler/24110112.pdfAsymmetric Risk AversionLeverage EffectUp and Down MarketsThreshold RegressionExponential GARCH-M |
| spellingShingle | Srikanta Kundu Nityananda Sarkar Is the Effect of Risk on Stock Returns Different in Up and Down Markets? A Multi-Country Study International Econometric Review Asymmetric Risk Aversion Leverage Effect Up and Down Markets Threshold Regression Exponential GARCH-M |
| title | Is the Effect of Risk on Stock Returns Different in Up and Down Markets? A Multi-Country Study |
| title_full | Is the Effect of Risk on Stock Returns Different in Up and Down Markets? A Multi-Country Study |
| title_fullStr | Is the Effect of Risk on Stock Returns Different in Up and Down Markets? A Multi-Country Study |
| title_full_unstemmed | Is the Effect of Risk on Stock Returns Different in Up and Down Markets? A Multi-Country Study |
| title_short | Is the Effect of Risk on Stock Returns Different in Up and Down Markets? A Multi-Country Study |
| title_sort | is the effect of risk on stock returns different in up and down markets a multi country study |
| topic | Asymmetric Risk Aversion Leverage Effect Up and Down Markets Threshold Regression Exponential GARCH-M |
| url | http://www.era.org.tr/makaleler/24110112.pdf |
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