No abstract

We propose that covariance (rather than beta) asymmetry provides a superior framework for examining issues related to changing risk premiums. Accordingly, we investigate whether the conditional covariance between stock and market returns is asymmetric in response to good and bad news. Our model of conditional covariance accommodates both the sign and magnitude of return innovations, and we find significant covariance asymmetry that can explain, at least in part, the volatility feedback of stock returns. Our findings are consistent across firm size, firm leverage, and temporal and cross-sectional aggregations. 2004 The Southern Finance Association and the Southwestern Finance Association.

Feedback trading, Markov switching, Australia, G10,

In this article we develop a 'behavioural' Intertemporal Capital Asset Pricing Model (ICAPM) in which the behavioural impetus comes from the feedback trading implications for the autocorrelation of returns. We apply the model in a setting of paired equity and bond investments, employing a bivariate diagonal Berndt-Engle-Kraft-Kroner (BEKK) framework. Our empirics rely on daily equity and bond index returns across six major economies, over the period 1 January 1990 to 30 June 2005. We find evidence supporting the theory that the observed dynamics of serial correlation can be a function of both volatility and conditional covariance (between equity and bonds). Moreover, our behavioural ICAPM shows empirical promise as a useful model of asset pricing in markets that display the feedback trading phenomenon.feedback trading, autocorrelated returns, behavioural ICAPM, GARCH-M, equity and bond markets, international evidence,