Forecasting Asymmetries in Aggregate Stock Market Returns: Evidence from Conditional Skewness

This paper provides a time-series test for the Differences-of-Opinion theory proposed by Hong and Stein (2003) in the aggregate market, thus extending Chen, Hong, and Stein's (2001) cross-sectional test for this theory across individual stocks. An autoregressive conditional density model with a skewed-t distribution is used to estimate the effects of past trading volume on return asymmetry. Using NYSE and AMEX data from 1962 to 2000, we find that the prediction of the Hong-Stein model that negative skewness will be most pronounced under high trading volume conditions is not supported in our time-series analysis with market data.

[1]  N. L. Johnson,et al.  Systems of frequency curves generated by methods of translation. , 1949, Biometrika.

[2]  B. Hansen.  Autoregressive Conditional Density Estimation , 1994 .

[3]  M. Watson,et al.  Bubbles, Rational Expectations and Financial Markets , 1982 .

[4]  Jiang Wang,et al.  Trading Volume and Serial Correlation in Stock Returns , 1992 .

[5]  J. Stein,et al.  Differences of Opinion, Short-Sales Constraints, and Market Crashes , 2003 .

[6]  Campbell R. Harvey,et al.  Current Version : April 6 , 1999 Autoregressive Conditional Skewness , 1999 .

[7]  Christopher G. Lamoureux,et al.  Heteroskedasticity in Stock Return Data: Volume versus GARCH Effects , 1990 .

[8]  James B. McDonald,et al.  A Flexible Parametric Garch Model With An Application To Exchange Rates , 2001 .

[9]  Daniel B. Nelson.  CONDITIONAL HETEROSKEDASTICITY IN ASSET RETURNS: A NEW APPROACH , 1991 .

[10]  L. Glosten,et al.  On the Relation between the Expected Value and the Volatility of the Nominal Excess Return on Stocks , 1993 .

[11]  M. Harris,et al.  Differences of Opinion Make a Horse Race , 1993 .

[12]  Neil D. Pearson,et al.  Differential Interpretation of Public Signals and Trade in Speculative Markets , 1995, Journal of Political Economy.

[13]  Charles M. C. Lee,et al.  Price Momentum and Trading Volume , 1998 .

[14]  Stephen Figlewski,et al.  Options, Short Sales, and Market Completeness , 1993 .

[15]  Lilian Ng,et al.  The sources of GARCH: empirical evidence from an intraday returns model incorporating systematic and unique risks , 1993 .

[16]  Campbell R. Harvey,et al.  Emerging Equity Market Volatility , 1995 .

[17]  T. Bollerslev,et al.  A CONDITIONALLY HETEROSKEDASTIC TIME SERIES MODEL FOR SPECULATIVE PRICES AND RATES OF RETURN , 1987 .

[18]  Anthony S. Tay,et al.  Evaluating Density Forecasts with Applications to Financial Risk Management , 1998 .

[19]  Guojun Wu,et al.  Asymmetric Volatility and Risk in Equity Markets , 1997 .

[20]  Terrance Odean,et al.  Volume, Volatility, Price, and Profit When All Traders are Above Average , 1998 .

[21]  Campbell R. Harvey,et al.  Autoregressive conditional skewness , 1999 .