English, Article, Journal or magazine article edition: Business Cycle Asymmetries in Stock Returns: Evidence from Higher Order Moments and Conditional Densities Allan G. Timmermann; Gabriel Perez-Quiros

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Bookmark: http://trove.nla.gov.au/version/45024
Physical Description
  • preprint
Language
  • English

Edition details

Title
  • Business Cycle Asymmetries in Stock Returns: Evidence from Higher Order Moments and Conditional Densities
Author
  • Allan G. Timmermann
  • Gabriel Perez-Quiros
Physical Description
  • preprint
Notes
  • Markow switching models with time-varying means, variances and mixing weights are applied to charakterize business cycle variation in the probability distribution and higher order moments of stock returns. This allows us to provide a comprehensive characterization of risk that goes well beyond the mean and variance of returns. Several mixture models with different specifications of the state transition are compared and we propose a new mixture of Gaussian and student-t distributions that captures outliers in returns. The models produce very similar expected returns and volatilities but imply very different time series for conditional skewness, kurtosis and predictive density. Consistent with economic theory, the gains in predictive accuracy from considering two-state mixture models rather than a single-state specification are higher for small firms than for large firms. JEL Classification: C22; C52.
  • Markov switching; density modelling; mixtures of distributions; business cycle risk.
  • RePEc:ecb:ecbwps:20010058
  • Markov switching models with time-varying means, variances and mixing weights are applied to characterize business cycle variation in the probability distribution and higher order moments of stock returns. This allows us to provide a comprehensive characterization of risk that goes well beyond the mean and variance of returns. Several mixture models with different specifications of the state transition are compared and we propose a new mixture of Gaussian and student-t distributions that captures outliers in returns. The models produce very similar expected returns and volailites but imply very different time series for conditional skewness, kurtosis and predictive density. Consistent with economic theory, the gains in predictive accuracy from considering two-state mixture models rather than a single-state specification are higher for small firms than for large firms.
  • RePEc:fmg:fmgdps:dp360
Language
  • English
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