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.
|Number of pages||22|
|Journal||Journal of International Financial Markets, Institutions and Money|
|State||Published - Dec 2003|
Bibliographical noteFunding Information:
This study was partly supported by the Faculty Research Grant (K. Nam) from the University of Texas-Pan American and a summer research grant (C. Pyun) from the Center for International Business and Education Research at the University of Memphis.
- Asymmetric mean-reversion
- Nonlinear asymmetric GARCH model
- Pacific-basin stock markets