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Modelling nonlinearities in equity returns: the mean impact curve analysis

Author

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  • Martin Vance L.

    (University of Melbourne, Melbourne, Australia)

  • Sarkar Saikat

    (School of Business and Economics, University of Jyväskylä, Jyväskylä, Finland)

  • Kanto Antti Jaakko

    (Department of Law, University of Tampere, Tampere, Finland)

Abstract

A time-varying model of equity returns consisting of a volatility factor with time-varying loading, is specified to investigate the dynamical effects of shocks on expected returns. The proposed specification yields a nonlinear relationship between the conditional mean and the news, referred to as the mean impact curve (MIC). Applying this framework to the AORD, Hang Seng and Straits Times equity indexes yields estimated MICs with qualitatively similar nonlinear characteristics for each equity market. An important implication of the empirical results is that the relationship between the conditional mean and the news is found to be dependent upon the size of the shock, a result which is consistent with equity markets displaying mean aversion over short horizons and mean reversion over long horizons.

Suggested Citation

  • Martin Vance L. & Sarkar Saikat & Kanto Antti Jaakko, 2014. "Modelling nonlinearities in equity returns: the mean impact curve analysis," Studies in Nonlinear Dynamics & Econometrics, De Gruyter, vol. 18(1), pages 51-72, February.
    • Handle: RePEc:bpj:sndecm:v:18:y:2014:i:1:p:51-72:n:1
    DOI: 10.1515/snde-2012-0030
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    References listed on IDEAS

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    1. Martin, Vance L. & Tang, Chrismin & Yao, Wenying, 2018. "News and expected returns in East Asian equity markets: The RV-GARCHM model," Journal of Asian Economics, Elsevier, vol. 57(C), pages 36-52.

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