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Non‐linear dynamics in international stock market returns
Author(s) -
McMillan David G.
Publication year - 2004
Publication title -
review of financial economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.347
H-Index - 41
eISSN - 1873-5924
pISSN - 1058-3300
DOI - 10.1016/j.rfe.2004.09.001
Subject(s) - economics , financial economics , equity (law) , arbitrage , stock (firearms) , sample (material) , limits to arbitrage , extant taxon , stock market , econometrics , mechanical engineering , paleontology , chemistry , chromatography , horse , evolutionary biology , political science , law , biology , engineering
Recent empirical finance research has reported non‐linear dynamics within asset returns. However, much of this extant research has focussed upon asset markets within the US and UK. This paper examines whether such dynamics are also present in a series of six international equity index returns. Using empirical models which are consistent that the theoretical behavioural finance noise trader motivation of non‐linearity, whereby market dynamics differ between small and large returns, our results suggest these models improve the in‐sample fit and out‐of‐sample forecast over linear alternatives. Further, the point of regime transition differs between positive and negative returns indicating that noise traders are more likely to engage in trend‐chasing behaviour in up markets and anchoring behaviour in down markets. Finally, the forecast gain in the Asia‐Pacific markets is greater than in the European markets suggestive that limits to arbitrage are greater perhaps as fundamental traders knowledge of market dynamics and noise trader behaviour is still evolving.