Is asymmetric mean-reverting pattern in stock returns systematic? Evidence from Pacific-basin markets in the short-horizon

Kiseok Nam, Chong Soo Pyun, Sei Wan Kim

Research output: Contribution to journalArticlepeer-review

24 Scopus citations

Abstract

This paper applies asymmetric nonlinear smooth transition generalized autoregressive conditional heteroskedasticity (ANST-GARCH) models to the analysis of mean-reversion and time-varying volatility in weekly index returns of the stock markets of nine countries in the Pacific-basin. It finds that the returns exhibit an asymmetric pattern of return reversals, viz., on average, a negative return reverts more quickly, with a greater magnitude, to a positive return than a positive return reverting to a negative one. The asymmetric pattern of return reversals is directly associated with the unequal pricing behavior on the part of investors. Following a negative return shock, investors do not appear to require any additional premium to the leverage effect; instead they actually neutralize the risk in the form of a reduced premium! The reduction in risk premium causes not only the current stock price to rise but also the realized negative return to revert faster with a greater magnitude.

Original languageEnglish
Pages (from-to)481-502
Number of pages22
JournalJournal of International Financial Markets, Institutions and Money
Volume13
Issue number5
DOIs
StatePublished - Dec 2003

Keywords

  • Asymmetric mean-reversion
  • Nonlinear asymmetric GARCH model
  • Pacific-basin stock markets

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