Price extremes and asymmetric dependence structures in stock returns: the emerging market evidence

Saji Thazhungal Govindan Nair

Journal of Economic Studies, 2021, vol. 49, issue 8, 1502-1523

Abstract: Purpose - Equity research in experimental psychology reveals investors' overreactions to bad news events. This study of asymmetric price structures in equity markets investigates whether such behavior predicts stock returns in an emerging market of India. Design/methodology/approach - The research decomposes Bombay Stock Exchange (BSE) Sensex returns into Extremely Positive Returns (EPR) and Extremely Negative Returns (ENR) based on extreme values at first and then tests their lead–lag relations. Findings - The empirical finding is consistent with the existing evidence of asymmetric news effects on stock returns in India. In precise, ENR robustly predicts one-month-ahead EPR for the sample period from January 1991 to March 2020. This predictive power persists even in the presence of popular valuation ratios and business cycle variables. Practical implications - The paper explains the rationale of extreme value modeling in price forecasting. Investors can find additional utility gains from market cycle information while predicting extreme returns in Indian stock market. Originality/value - The paper is unique to understand business cycle effects in extreme return reversals in emerging markets.

Keywords: Asymmetry; Price extremes; Extremely positive returns; Extremely negative returns; C58; D53; G12 (search for similar items in EconPapers)
Date: 2021
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Persistent link: https://EconPapers.repec.org/RePEc:eme:jespps:jes-10-2021-0507

DOI: 10.1108/JES-10-2021-0507

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