Variation of interest-rate parity and its asymmetry on stock return in a jump-diffusion process

Jer-Shiou Chiou, Pei-Shan Wu and Ming-Chih Lee

Applied Financial Economics, 2006, vol. 16, issue 17, 1309-1316

Abstract: Two-stage methodology is developed to verify how the unanticipated asymmetry variations affect the stock returns. A GARCH model is investigated on residuals from a CIP identification followed by an ARJI model examination of the stock return. Consequently, a negative exogenous change can result of a more downward impact on stock return. Although this exogenous change is environmental, it could be implicated in macro-data. Because of the similarity in politics and economics, Korea and Taiwan were considered. Based upon the derivation of CIP, stock returns are found to be asymmetrically sensitive to the environment. The conditional jumps are larger than those where the news is of no substance. The findings demonstrate the importance of the stability.

Date: 2006
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DOI: 10.1080/09603100500447495

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