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Global predictive power of the upside and downside variances of the U.S. equity market

Yahua Xu, Jun Xiao and Liguo Zhang

Economic Modelling, 2020, vol. 93, issue C, 605-619

Abstract: Given the pace of increasing globalization and the pioneering role of the U.S. economy, we anlayze the global impact of the U.S. equity market’s uncertainty. The asymmetric impact of upside (downside) uncertainty, related with the upward (downward) movements of the underlying assets, has raised substantial concerns recently. We comprehensively analyze the global predictability of the upside and downside variances of the U.S. equity market, implied by S&P-500 calls and puts, respectively. We contribute to the literature on the asymmetric impacts of the upside and downside variances of the U.S. equity market in an international setting. Our study also complements the study on predicting international stock returns. Moreover, substantial economic value can be generated from the perspective of asset allocation. The main channel for the positive (negative) predictability of upside (downside) variance stems from its positive (negative) impacts on international investment, highlighting the leading role of the U.S. economy.

Keywords: Return prediction; Upside and downside variances; The U.S. equity market; Economic value (search for similar items in EconPapers)
JEL-codes: C53 G11 G15 G17 (search for similar items in EconPapers)
Date: 2020
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DOI: 10.1016/j.econmod.2020.09.006

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