A nonlinear model of asset returns with multiple shocks

Kahra Hannu, Vance Martin and Sarkar Saikat ()
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Kahra Hannu: Oulu Business School, Oulu University, Oulu, Finland
Sarkar Saikat: Department of Commerce, Mount Allison University, 65 York Street, Sackville, NB-E4L1E4, Canada, Phone: 647-606-1278

Studies in Nonlinear Dynamics & Econometrics, 2019, vol. 23, issue 1, 44

Abstract: A nonlinear model of asset returns allowing for multiple shocks is specified. The nonlinear features of the model are demonstrated graphically using a 3-dimensional diagram referred to as the mean impact surface. A new class of nonlinearity tests is also developed which is compared with existing testing methodologies. Applying the framework using excess returns on US and world equities the empirical results provide strong statistical evidence that domestic and foreign shocks have nonlinear effects on expected returns in the US with the effects being determined by the sign and the size of shocks. In contrast, the effects on world expected returns from shocks in the US and the world are found to react more smoothly. The empirical nonlinearities identified are also shown to be robust to alternative choices of risk factors and distributional assumptions.

Keywords: multivariate mean impact surface; shock spillovers; testing (search for similar items in EconPapers)
JEL-codes: C12 C51 C58 G15 (search for similar items in EconPapers)
Date: 2019
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DOI: 10.1515/snde-2017-0064

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