Asymmetric risk and return: Evidence from the Australian Stock Exchange

Minh Vo, Michael Cohen and Terry Boulter

Pacific-Basin Finance Journal, 2015, vol. 35, issue PB, 558-573

Abstract: This paper examines volatility asymmetry in a financial market using a stochastic volatility framework. We use the MCMC method for model estimations. There is evidence of volatility asymmetry in the data. Our asymmetric stochastic volatility in mean model, which nests both asymmetric stochastic volatility (ASV) and stochastic volatility in mean models (SVM), indicates ASV sufficiently captures the risk-return relationship; therefore, augmenting it with volatility in mean does not improve its performance. ASV fits the data better and yields more accurate out-of-sample forecasts than alternatives. We also demonstrate that asymmetry mainly emanates from the systematic parts of returns. As a result, it is more pronounced at the market level and the volatility feedback effect dominates the leverage effect.

Keywords: Stochastic volatility; Leverage effect; Volatility asymmetry; Forecasting; MCMC (search for similar items in EconPapers)
JEL-codes: G00 G15 G17 (search for similar items in EconPapers)
Date: 2015
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Persistent link: https://EconPapers.repec.org/RePEc:eee:pacfin:v:35:y:2015:i:pb:p:558-573

DOI: 10.1016/j.pacfin.2015.10.003

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