Downside risk and stock returns: An empirical analysis of the long-run and short-run dynamics from the G-7 Countries

Cathy Yi-Hsuan Chen, Thomas C. Chiang and Wolfgang Härdle

No 2016-001, SFB 649 Discussion Papers from Humboldt University Berlin, Collaborative Research Center 649: Economic Risk

Abstract: This paper presents presents presents a fractionally cointegrated vector autoregression (FCVAR) (FCVAR) (FCVAR) (FCVAR) model to examine to examine to examine to examine to examine to examine to examine various relations between stock returns and downside risk. Evidence from major advanced markets markets markets markets supports the supports the notion that notion that notion that downside risk measured by value value value-at -risk ( risk (VaRVaRVaR) has significant information content content that reflects that reflects that reflects that reflects that reflects lagged long-run variance and higher moments of risk for for predict redict ing stock returns. stock returns. stock returns. stock returns. The e The e vidence vidence vidence supports the positive tradeoff hypothesis and and the leverage effect leverage effect leverage in the long in the long in the long run and and for markets in the short run. We find that US downside risk accounts for 54.36% of price discovery, whereas the whereas the whereas the whereas the own effect from own effect from the country itself only 27.06%.

Keywords: downside risk; value-at-risk; long memory; fractional integration; risk-return (search for similar items in EconPapers)
JEL-codes: C24 F30 G11 G12 G15 (search for similar items in EconPapers)
Date: 2016
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