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.
Review of Quantitative Finance and Accounting – Springer Journals
Published: Jan 1, 2006
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