Chen, Cathy Yi-Hsuan Chiang, Thomas C. Härdle, Wolfgang Karl
Year of Publication:
SFB 649 Discussion Paper 2016-001
This paper presents presents presents a fractionally cointegrated vector autoregression (FCVAR) (FCVAR) (FCVAR) (FCVAR) model to examine to examine to examine to examine to examine to examine to examine various relations between stock returns and downside risk. Evidence from major advanced markets markets markets markets supports the supports the notion that notion that notion that downside risk measured by value value value-at -risk ( risk (VaRVaRVaR) has significant information content content that reflects that reflects that reflects that reflects that reflects lagged long-run variance and higher moments of risk for for predict redict ing stock returns. stock returns. stock returns. stock returns. The e The e vidence vidence vidence supports the positive tradeoff hypothesis and and the leverage effect leverage effect leverage in the long in the long in the long run and and for markets in the short run. We find that US downside risk accounts for 54.36% of price discovery, whereas the whereas the whereas the whereas the own effect from own effect from the country itself only 27.06%.
downside risk value-at-risk long memory fractional integration risk-return