The nexus of asset pricing, volatility and the business cycle

Rahul Roy () and Santhakumar Shijin

Journal of Economic Studies, 2020, vol. 48, issue 1, 79-101

Abstract: Purpose - The purpose of the study is to examine the dynamics in the troika of asset pricing, volatility, and the business cycle in the US and Japan. Design/methodology/approach - The study uses a six-factor asset pricing model to derive the realized volatility measure for the GARCH-type models. Findings - The comprehensive empirical investigation led to the following conclusion. First, the results infer that the market portfolio and human capital are the primary discounting factors in asset return predictability during various phases of the subprime crisis phenomenon for the US and Japan. Second, the empirical estimates neither show any significant impact of past conditional volatility on the current conditional volatility nor any significant effect of subprime crisis episodes on the current conditional volatility in the US and Japan. Third, there is no asymmetric volatility effect during the subprime crisis phenomenon in the US and Japan except the asymmetric volatility effect during the post-subprime crisis period in the US and full period in Japan. Fourth, the volatility persistence is relatively higher during the subprime crisis period in the US, whereas during the subprime crisis transition period in Japan than the rest of the phases of the subprime crisis phenomenon. Originality/value - The study argues that the empirical investigations that employed the autoregressive method to derive the realized volatility measure for the parameter estimation of GARCH-type models may result in incurring spurious estimates. Further, the empirical results of the study show that using the six-factor asset pricing model in an intertemporal framework to derive the realized volatility measure yields better estimation results while estimating the parameters of GARCH-type models.

Keywords: Asset pricing; Business cycle; Human capital; Six-factor asset pricing model; olatility; C53; E24; F44; G12; H12 (search for similar items in EconPapers)
Date: 2020
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Persistent link: https://EconPapers.repec.org/RePEc:eme:jespps:jes-08-2019-0357

DOI: 10.1108/JES-08-2019-0357

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