Does Co-Movement of Conditional Volatility Matter in Asset Pricing? Further Evidence in the Downside and Conventional Pricing Frameworks

Icfai Journal of Applied Finance, Forthcoming

20th Australasian Finance & Banking Conference 2007 Paper

29 Pages Posted: 25 Sep 2007 Last revised: 7 Sep 2008

See all articles by Song Li

Song Li

Monash University

Don U. A. Galagedera

Monash University - Department of Econometrics and Business Statistics

Date Written: December 10, 2007

Abstract

In this paper we model country-specific equity market return and association between country-specific equity market volatility and that of the world market in the downside and conventional asset pricing frameworks. For this a Factor- ARCH type process is adopted where world market risk (beta) is estimated in the mean equation and exposure of country-specific market volatility to world market volatility (volatility beta) is estimated in the variance equation. Generally, the beta is estimated higher for developed markets than for emerging markets and the reverse is observed in volatility beta. Even though the two types of betas are positive and significant, a cross-sectional analysis reveals that volatility beta is not priced. We observe these results when the analysis is carried out from an international investor perspective. When we repeat the analysis in sub-periods delineated via breakpoints in the world market return series and with alternative specifications of the variance equation our findings remain largely unchanged.

Keywords: Downside risk, conditional volatility exposure, developed markets, emerging markets, asset pricing

JEL Classification: G12, G13, G15

Suggested Citation

Li, Song and Galagedera, Don (Tissa) U. A., Does Co-Movement of Conditional Volatility Matter in Asset Pricing? Further Evidence in the Downside and Conventional Pricing Frameworks (December 10, 2007). Icfai Journal of Applied Finance, Forthcoming, 20th Australasian Finance & Banking Conference 2007 Paper, Available at SSRN: https://ssrn.com/abstract=1002477

Song Li

Monash University ( email )

23 Innovation Walk
Wellington Road
Clayton, Victoria 3800
Australia

Don (Tissa) U. A. Galagedera (Contact Author)

Monash University - Department of Econometrics and Business Statistics ( email )

900 Dandenong Road
Caulfield East, VIC 3145
Australia
+61 3 9903 1578 (Phone)
+61 3 9903 2007 (Fax)

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