Thomas C. Chiang

Asymmetrical reaction to US stock-return news: evidence from major stock markets based on a double-threshold model

Abstract This paper examines the hypothesis that both stock returns and volatility are asymmetrical functions of past information from the US market. By employing a double-threshold GARCH model to investigate six major index-return series, we find strong evidence supporting the asymmetrical hypothesis of stock returns. Specifically, negative news from the US market will cause a larger decline in a national stock return than an equal magnitude of good news. This holds true for the volatility series. The variance appears to be more volatile when bad news impacts the market than when good news does.

Empirical Analysis of Stock Returns and Volatility: Evidence from Seven Asian Stock Markets Based on TAR-GARCH Model

This paper investigates the time-series behavior of stock returns for seven Asian stock markets. In most cases, higher average returns appear to be associated with a higher level of volatility. Testing the relationship between stock returns and unexpected volatility, the evidence shows that four out of seven Asian stock markets have significant results. Further analyzing the relationship between stock returns and time-varying volatility by using Threshold Autoregressive GARCH(1,1)-in-mean specification indicates that the null hypothesis of no asymmetric effect on the conditional volatility is rejected for the daily data. However, the null cannot be rejected for the monthly data.

A system of stock prices in world stock exchanges: Common stochastic trends for 1975-1990

Abstract This article reports an investigation of the behavior of stock prices in major world stock exchanges based on univariate and multivariate approaches. The evidence shows that each series of stock prices in the New York, London, Tokyo, and Frankfurt stock exchanges during the period from January 1975 through March 1990 has a unit root. The multivariate tests for unit roots, however, show that there are three unit roots in a system of stock prices in the worlds four largest stock exchanges, suggesting the existance of a common stochastic trend in the system. The subsample estimation results are consistent with greater globalization of world stock markets during the 1980s.

The Forward Rate as a Predictor of the Future Spot Rate--A Stochastic Coefficient Approach

This paper develops a stochastic coefficient model to examine the unbiased forward rate hypothesis for the period January 1974 to August 1983. Tests from the full-sample estimations confirm the null hypothesis. However, the re sults from the Brown-Durbin-Evans (1975) test and the Chow test indic ate that the exchange-rate behavior departs from parameter constancy. Using joint-rolling regressions for the subsample estimations, the a uthor finds evidence that the unbiasedness hypothesis in most cases s hould be rejected and that the estimated parameters, sensitive to new information, vary through different subsample periods. The out-of-sa mple test concludes that incorporation of the stochastic properties o f the parameters into the model improves accuracy of exchange-rate pr edictions. Copyright 1988 by Ohio State University Press.

International asset pricing and equity market risk

Abstract This paper presents a model to examine the behavioral relationship between the excess returns of foreign exchange and the variables that measure the risk factor. The test results of four major currencies support the hypothesis that the excess exchange returns are related to the relative risks of the two national equity markets. The evidence validates the existence of a risk premium in foreign exchange markets.

New Evidence on the Relation between Return Volatility and Trading Volume

In his seminal paper, Brooks argues that the relation between return volatility and trading volume can be both linear and nonlinear. Adopting both linear and nonlinear Granger causality tests, he shows that there exists both linear and nonlinear bi-directional causality between trading volumes and return volatility (measured by square of daily return). We re-examine his claims by using realized volatility as a more precise estimator of the unobserved volatility, adopting a stationary de-trended trading volume and applying a more recent data sample with robustness tests over time. Our linear Granger causality test shows that there is no causal linear relation running from volume to volatility but there exist an ambiguous causality for the reverse direction. In contrast, we find strong bi-directional nonlinear Granger causality between these two variables. Our results provide strong support for the sequential information theory and offer a promising prospect for developing nonlinear models to predict return volatility using trading volume.

Phase distribution and phase correlation of financial time series

The scaling, phase distribution, and phase correlation of financial time series are investigated based on the Dow Jones Industry Average and NASDAQ 10-min intraday data for a period from 1 Aug. 1997 to 31 Dec. 2003. The returns of the two indices are shown to have nice scaling behaviors and belong to stable distributions according to the criterion of Lévys alpha stable distribution condition. An approach catching characteristic features of financial time series based on the concept of instantaneous phase is further proposed to study the phase distribution and correlation. Analysis of the phase distribution concludes that return time series fall into a class which is different from other nonstationary time series. The correlation between returns of the two indices probed by the distribution of phase difference indicates that there was a remarkable change of trading activities after the event of the 9/11 attack, and this change persisted in later trading activities.

Foreign exchange risk premiums and time-varying equity market risks

This paper investigates the relationship between the excess returns of foreign exchanges and the conditional volatility of domestic and foreign equity markets, based on a wide range of foreign currency market data. Utilising a VAR-GARCH-in-mean process to generate conditional variances, we find evidence to support the time varying, risk-premium hypothesis. Moreover, our evidence shows that the volatility evolution of stock returns displays not only a clustering phenomenon, but also a significant spillover effect. Given the fact that the correlation structure across markets is significant and time varying, investors and portfolio managers should continually assess this information and rebalance their portfolios over time to achieve optimal diversification.

Do foreign exchange risk premiums relate to the volatility in the foreign exchange and equity markets

Empirical tests are performed to examine whether foreign exchange excess returns for the British pound, Canadian dollar, Deutsche mark, and Japanese yen are related to volatility in the currency market and volatility in the stock markets. Our results indicate that volatility (measured by standard deviation and variance) from currency markets is significant in explaining the excess returns, suggesting that the excess returns are indeed reward for risk-taking. In addition, shocks in equity markets are found to have a significant impact on currency risk premium as well. In some cases, we find nonlinearity in the risk premium. Finally, our results emerged from Glosten, Jagannathan, Runkles model (Journal of Finance,48 (5), 1993) suggest that risk premiums for each currency tend to respond to positive and negative shocks differently.

Retrieving the Vanishing Liquidity Effect—A Threshold Vector Autoregressive Model

Abstract This paper employs a threshold vector autoregressive (TVAR) model where the data is subdivided into low and high inflation regimes. Monetary policy is endogenized in this framework and two different measures of monetary policy, viz. NBR and M1, are investigated. The interest rate is hypothesized to respond inversely to increased monetary growth in the low inflation regime and positively to increased monetary growth in the high inflation regime. In the low inflation regime, expansionary monetary policy shocks are found to depress the interest rate over 10 and 5 periods for nonborrowed reserves and M1 growth, respectively. Whereas, in the high inflation regime, both measures generate positive responses. It follows that the hypothesized threshold behavior between money and the interest rate is supported regardless of monetary measures.