Asymmetric volatility and conditional expected returns

Abstract

Purpose -The risk-return relationship is one of the most widely investigated topics in finance, yet this relationship remains one of the most controversial topics. The purpose of this paper is to investigate the asymmetric volatility and the risk-return tradeoff at the sector level in the emerging stock market of Jordan. Design/methodology/approach -Data consist of daily prices for 22 sub-sectors spanning from August 1, 2006, to September 30, 2015, covering the periods of pre, during, and after the global financial crisis. The EGARCH-M model is used to document the patterns of asymmetric volatility of sub-sector returns and the risk-return tradeoff during the non-overlapping three sub-sample periods. Findings -The major findings of this study are as follows. In the pre-crisis period, the results suggest some evidence of a positive relationship between risk and return. The results also reveal that good news has more effect than bad news during the same period. In the crisis period, there is a negative but insignificant risk-return relationship and negative shocks have more impact than positive ones. In the post-crisis period, the authors find positive but insignificant risk-return tradeoff with weak evidence of volatility asymmetry. Practical implications -The results have major implications for investors willing to engage their investment decisions in the Amman Stock Exchange (ASE) and for policymakers who seek to attract and retain regional and international investors. Since the empirical investigation is conducted at the sector level, the study may aid investors to target specific sub-sectors with positive and significant risk-return tradeoff. In addition, investors need to monitor the asymmetric patterns which make the level of risk-aversion more susceptible to coming news. For policymakers, the latest infrastructure reforms are crucial to achieving the potential for growth but the ASE market authority needs to undergo further reforms and provide various promotional incentives. Originality/value -Although there are numerous studies on asymmetric volatility and risk-return tradeoff, there is a lack of parallel studies at the sector level for both developed and emerging stock markets. Such assessment at the sector level is crucial for international investors after their choice of countries or markets for better choice of portfolio diversification and allocation of financial resources.

The impacts of global economic policy uncertainty on stock market returns in regime switching environment: Evidence from sectoral perspectives

“…Thus, in line with Kim and Lee (), Cotter and Salvador (), and Salvador et al (2014), this study can postulate that investors' risk aversion to global economic policy is state dependent as procyclicality and countercyclicality in investor risk aversion are inferred in low‐ and high‐volatility regimes, respectively. Henceforth, the findings support the extant empirical studies that have showed the state‐varying risk–return trade off (e.g, Al Refai, Abdelaziz Eissa, & Zeitun, ; Chen & Chiang, ; Chen & Kawaguchi, ; Cotter & Salvador, ; Lee, 2008; Salvador et al, ). Moreover, the effects of GEPU on sectoral stock returns are heterogenous that is true as industry's dependency on global policy is not same for all.…”

Co-movement dynamics between global sukuk and bond markets

“…Furthermore, as contagion is rapidly increasing among financial markets, it is crucial to examine the causal effects among these markets. Some researchers examined the contagion effect among the financial markets such as Shabri Abd Majid and Hj Kassim (2009), Kiymaz (2013), Saiti et al (2016), Vortelinos (2016), Al Refai et al (2017) among others. In the case of comparing the performance in developed and developing countries, Ruiz et al (2017) tested the development of the institutional context contributes to the creation of hypercompetitive conditions by using data from both developing and developed countries.…”

Modeling Asymmetric Effects and Long Memory in Conditional Volatility of Dhaka Stock Exchange: New Evidence from Family of FIGARCH Models

“…Mollah & Mobarek [28] look at the time-varying risk-return relationship and the persistence of volatility shocks in developed and emerging markets using the GARCH method. Al Refai et al [29] aim to look at asymmetric volatility and the risk-return Tradeoff in Jordan's emerging stock market at the sector level and find some proof of a positive relationship between risk and return before the crisis period. There is a negative but negligible risk-return relationship during the crisis, and negative shocks have a greater effect than positive ones.…”