Premium
ASYMMETRIC COVARIANCE, VOLATILITY, AND THE EFFECT OF NEWS
Author(s) -
Dean Warren G.,
Faff Robert W.
Publication year - 2004
Publication title -
journal of financial research
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.319
H-Index - 49
eISSN - 1475-6803
pISSN - 0270-2592
DOI - 10.1111/j.1475-6803.2004.00097.x
Subject(s) - covariance , econometrics , leverage effect , economics , asymmetry , volatility (finance) , stock (firearms) , conditional variance , financial economics , leverage (statistics) , information asymmetry , sign (mathematics) , covariance function , autoregressive conditional heteroskedasticity , statistics , mathematics , microeconomics , geography , mathematical analysis , physics , quantum mechanics , archaeology
We propose that covariance (rather than beta) asymmetry provides a superior framework for examining issues related to changing risk premiums. Accordingly, we investigate whether the conditional covariance between stock and market returns is asymmetric in response to good and bad news. Our model of conditional covariance accommodates both the sign and magnitude of return innovations, and we find significant covariance asymmetry that can explain, at least in part, the volatility feedback of stock returns. Our findings are consistent across firm size, firm leverage, and temporal and cross‐sectional aggregations.