Mean Reversion of Short-Horizon Stock Returns: Asymmetry Property |
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Authors: | Kiseok Nam Sei-Wan Kim Augustine C Arize |
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Institution: | (1) Department of Economics & Finance, Pan American, University of Texas, Edinburg, TX, 78539;(2) Department of Economics, California State University, Fullerton, CA, 92834;(3) Department of Economics, Ewha Womans University, Seoul, Korea;(4) Department of Business Administration & Management Information Systems, College of Business &Technology, Texas A&M University-Commerce, Commerce, TX, 75429 |
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Abstract: | In this paper, we explore nonlinearity inherent in short-horizon return dynamics, which is characterized by an asymmetric
mean-reverting property. Over the period of 1962:07–2003:12, both daily and weekly returns of three market indexes and individual
stock returns exhibit a strong asymmetric reverting pattern in which a negative return reverts more quickly, with a greater
reverting magnitude, than positive returns revert to negative returns. The observed asymmetric reverting pattern is not justified
under the positive relationship between future volatility and risk premium, which is a key presumption in the time-varying
rational expectation hypothesis. The asymmetric reverting behavior of stock returns explored by this paper corroborates the
argument for the relative performance of “winner' and “loser' stocks that has been documented by contrarian literature.
JEL Classification: 14, C40, C51 |
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Keywords: | short-horizon stock returns asymmetric reverting pattern short-run contrarian profits |
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