A test of asymmetric comovement for state-dependent stock returns

Kaihua Deng

Journal of Empirical Finance, 2016, vol. 36, issue C, 68-85

Abstract: I propose a test of asymmetric stock return comovement across states. The test can be viewed as a variation of Kendall's τ conditional on the state and has an asymptotic χ2-distribution. A refined version of the test is derived based on the Markov chain theory of regenerative cycles which substantially improves finite sample size and power properties. I show that the test has power against local alternatives, which is nonetheless compromised due to a finite sample convergence bound put on the implied local alternative data generating process. I evaluate the new test against traditional correlation-based measures and demonstrate power attrition of a state-free tail dependence test as parameter values are varied. Broad market-based ETFs and international indices are studied and in most cases there is no compelling evidence for asymmetric comovement across states. A list of related tests is given as an extension at the end.

Keywords: Empirical process; Markov-switching model; Power analysis; Regenerative cycle (search for similar items in EconPapers)
JEL-codes: C12 C14 C24 (search for similar items in EconPapers)
Date: 2016
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:empfin:v:36:y:2016:i:c:p:68-85

DOI: 10.1016/j.jempfin.2016.01.009

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