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Macroeconomic Factors and the Asymmetric Predictability of Conditional Variances
Author(s) -
Hasan Iftekhar,
Francis Bill B.
Publication year - 1998
Publication title -
european financial management
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.311
H-Index - 64
eISSN - 1468-036X
pISSN - 1354-7798
DOI - 10.1111/1468-036x.00064
Subject(s) - predictability , conditional variance , econometrics , autoregressive conditional heteroskedasticity , volatility (finance) , economics , variance (accounting) , dividend yield , dividend , financial economics , statistics , mathematics , dividend policy , finance , accounting
This paper investigates the predictability of the volatilities of large versus small firms. Using AR‐GARCH models we show that there is symmetry in the ability of firms of different market values to predict conditional variances. Specifically, we show that volatility surprises of small (large) firms are important in predicting the conditional variance of large (small) firms. These results are different than those previously reported which indicate that there is an asymmetry in the predictability of the volatilities of large versus small firms. This predictive ability is still present when the equation of conditional variance includes state variables such as the default premium, dividend yield and the term premium. Finally, our results indicate that the pattern of symmetric predictability is present in both pre‐ and post‐war sample periods.