Authors: M. Li 1 and S. Yen
View More View Less
  • 1 National Cheng Kung University, Taiwan Department of Accountancy, Graduate Institute of Finance and Banking No.1, Ta-Hsueh Road Tainan 701 Taiwan
Restricted access

Purchase article

USD  $25.00

1 year subscription (Individual Only)

USD  $700.00

This investigation is one of the first to adopt quantile regression (QR) technique to examine covariance risk dynamics in international stock markets. Feasibility of the proposed model is demonstrated in G7 stock markets. Additionally, two conventional random-coefficient frameworks, including time-varying betas derived from GARCH models and state-varying betas implied by Markov-switching models, are employed and subjected to comparative analysis. The empirical findings of this work are consistent with the following notions. First, the beta smile (beta skew) curve for the Italian, U.S. and U.K. (Canadian, French and German) markets. That is, covariance risk among global stock markets in extremely bull and/or bear market states is significantly higher than in stable periods. Additionally, the Japanese market provides a special case, and its beta estimate at extremely bust state is significantly lower, not higher than that at the middle region. Second, the quantile-varying betas are identified as possessing two key advantages. Specifically, the comparison of the system with quantile-varying betas against that with time-varying betas implied by GARCH models provides meaningful implications for correlation-volatility relationship among international stock markets. Furthermore, the quantile-varying beta design in this study relaxes a simple dual beta setting implied by Markov-switching models of Ramchand — Susmel (1998) and can identify dynamics of asymmetry in betas.

  • Bekaert, G. — Harvey, C. (1995): Time-varying World Market Integration. Journal of Finance, 50(2): 403–444.

    Harvey C. , 'Time-varying World Market Integration ' (1995 ) 50 Journal of Finance : 403 -444.

    • Search Google Scholar
  • Bhardwaj, R. K. — Brooks, L. D. (1993): Dual Betas from Bull and Bear Markets: Reversal of the Size Effect. Journal of Financial Research, 16(4): 269–283.

    Brooks L. D. , 'Dual Betas from Bull and Bear Markets: Reversal of the Size Effect ' (1993 ) 16 Journal of Financial Research : 269 -283.

    • Search Google Scholar
  • Braun, P. A. — Nelson, D. — Sunier, A. (1995): Good News, Bad News, Volatility and Betas. Journal of Finance, 50(5): 1575–1603.

    Sunier A. , 'Good News, Bad News, Volatility and Betas ' (1995 ) 50 Journal of Finance : 1575 -1603.

    • Search Google Scholar
  • Bollerslev, T. — Chou, R. Y. — Kroner, K. F. (1992): ARCH Modeling Finance. A Review of the Theory and Empirical Evidence. Journal of Econometrics, 52(1–2): 5–59.

    Kroner K. F. , 'ARCH Modeling Finance ' (1992 ) 52 A Review of the Theory and Empirical Evidence. Journal of Econometrics : 5 -59.

    • Search Google Scholar
  • Bollerslev, T. T. — Engle, R. F. — Wooldredge, J. M. (1988): A Capital Asset Pricing Model with Time-varying Covariances. Journal of Political Economy, 96: 116–131.

    Wooldredge J. M. , 'A Capital Asset Pricing Model with Time-varying Covariances ' (1988 ) 96 Journal of Political Economy : 116 -131.

    • Search Google Scholar
  • Dumas, B. — Solnik, B. (1995): The World Price of Foreign Exchange Risk. Journal of Finance, 50(2): 445–479.

    Solnik B. , 'The World Price of Foreign Exchange Risk ' (1995 ) 50 Journal of Finance : 445 -479.

    • Search Google Scholar
  • Ferson, W. E. — Harvey, C. R. (1993): The Risk and Predictability of International Equity Returns. Review of Financial Studies, 6(3): 527–566.

    Harvey C. R. , 'The Risk and Predictability of International Equity Returns ' (1993 ) 6 Review of Financial Studies : 527 -566.

    • Search Google Scholar
  • Fletcher, J. (2000): On the Conditional Relationship between Beta and Return in International Stock Returns. International Review of Financial Analysis, 9(3): 235–245.

    Fletcher J. , 'On the Conditional Relationship between Beta and Return in International Stock Returns ' (2000 ) 9 International Review of Financial Analysis : 235 -245.

    • Search Google Scholar
  • Gregory, K. — Johan, K. (2002): Time Variation and Asymmetry in Systematic Risk: Evidence from the Finnish Stock Exchange. Journal of Multinational Financial Management, 12(3): 261–271.

    Johan K. , 'Time Variation and Asymmetry in Systematic Risk: Evidence from the Finnish Stock Exchange ' (2002 ) 12 Journal of Multinational Financial Management : 261 -271.

    • Search Google Scholar
  • Hamilton, J. D. (1989): A New Approach to the Economic Analysis of Nonstationary Time Series and the Business Cycle. Econometrica, 57(2): 357–384.

    Hamilton J. D. , 'A New Approach to the Economic Analysis of Nonstationary Time Series and the Business Cycle ' (1989 ) 57 Econometrica : 357 -384.

    • Search Google Scholar
  • Harvey, C. R. (1991): The World Price Covariance Risk. Journal of Finance, 46(1): 111–157.

    Harvey C. R. , 'The World Price Covariance Risk ' (1991 ) 46 Journal of Finance : 111 -157.

  • Koenker, R. (2000): Galton, Edgeworth, Frisch, and Prospects for Quantile Regression in Econometrics. Journal of Econometrics, 95(2): 347–374.

    Koenker R. , 'Galton, Edgeworth, Frisch, and Prospects for Quantile Regression in Econometrics ' (2000 ) 95 Journal of Econometrics : 347 -374.

    • Search Google Scholar
  • Koenker, R. — Bassett, G. (1978): Regression Quantile. Econometrica, 46: 33–50.

    Bassett G. , 'Regression Quantile ' (1978 ) 46 Econometrica : 33 -50.

  • Koenker, R. — Hallock, K. F. (2001): Quantile Regression. Journal of Economic Perspectives, 15(4): 143–156.

    Hallock K. F. , 'Quantile Regression ' (2001 ) 15 Journal of Economic Perspectives : 143 -156.

    • Search Google Scholar
  • Li, M. Y. L. (2007): Volatility States and International Diversification of International Stock Markets. Applied Economics, 39(15): 1867–1876.

    Li M. Y. L. , 'Volatility States and International Diversification of International Stock Markets ' (2007 ) 39 Applied Economics : 1867 -1876.

    • Search Google Scholar
  • Li, M. Y. L. (2009a): Value or Volume Strategy? Finance Research Letters, 6(4): 210–218.

    Li M. Y. L. , 'Value or Volume Strategy? ' (2009 ) 6 Finance Research Letters : 210 -218.

  • Li, M. Y. L. (2009b): Change in Volatility Regimes and Diversification in Emerging Stock Markets. South African Journal of Economics, 77(1): 59–80.

    Li M. Y. L. , 'Change in Volatility Regimes and Diversification in Emerging Stock Markets ' (2009 ) 77 South African Journal of Economics : 59 -80.

    • Search Google Scholar
  • Li, M. Y. L. (2010): Re-examining the Risk-return Relationship in Banks Using Quantile Regression. Service Industries Journal, 30(11): 1871–1881.

    Li M. Y. L. , 'Re-examining the Risk-return Relationship in Banks Using Quantile Regression ' (2010 ) 30 Service Industries Journal : 1871 -1881.

    • Search Google Scholar
  • Li, M. Y. L. — Miu, P. (2010): A Hybrid Bankruptcy Prediction Model with Dynamic Loadings on Accounting-ratio-based and Market-based Information: A Binary Quantile Regression Approach. Journal of Empirical Finance, 17(4): 818–833.

    Miu P. , 'A Hybrid Bankruptcy Prediction Model with Dynamic Loadings on Accounting-ratio-based and Market-based Information: A Binary Quantile Regression Approach ' (2010 ) 17 Journal of Empirical Finance : 818 -833.

    • Search Google Scholar
  • Longin, F. — Solnik, M. B. (1995): Is the Correlation on International Equity Returns Constant: 1960–1990. Journal of International Money and Finance, 14(1): 3–23.

    Solnik M. B. , 'Is the Correlation on International Equity Returns Constant: 1960–1990 ' (1995 ) 14 Journal of International Money and Finance : 3 -23.

    • Search Google Scholar
  • Mark, N. (1988): Time-varying Betas and Risk Premia in the Pricing of Forward Foreign Exchange Contracts. Journal of Financial Economics, 22(2): 355–354.

    Mark N. , 'Time-varying Betas and Risk Premia in the Pricing of Forward Foreign Exchange Contracts ' (1988 ) 22 Journal of Financial Economics : 355 -354.

    • Search Google Scholar
  • Nelson, D. B. (1991): Conditional Heteroskedasticity in Asset Returns: A New Approach. Econometrica, 59(2): 347–370.

    Nelson D. B. , 'Conditional Heteroskedasticity in Asset Returns: A New Approach ' (1991 ) 59 Econometrica : 347 -370.

    • Search Google Scholar
  • Ng, L. (1991): Testing the CAPM with Time-varying Covariances: A Multivariate GARCH Approach. Journal of Finance, 46(4): 1507–1521.

    Ng L. , 'Testing the CAPM with Time-varying Covariances: A Multivariate GARCH Approach ' (1991 ) 46 Journal of Finance : 1507 -1521.

    • Search Google Scholar
  • Pettengill, G. — Sundaram, S. — Mathur, I. (1995): The Conditional Relation between Beta and Return. Journal of Financial Quantitative Analysis, 30(1): 101–116.

    Mathur I. , 'The Conditional Relation between Beta and Return ' (1995 ) 30 Journal of Financial Quantitative Analysis : 101 -116.

    • Search Google Scholar
  • Ramchand, L. — Susmel, R. (1997): Volatility and Cross Correlation across Major Stock Markets. Journal of Empirical Finance, 5(4): 397–416.

    Susmel R. , 'Volatility and Cross Correlation across Major Stock Markets ' (1997 ) 5 Journal of Empirical Finance : 397 -416.

    • Search Google Scholar
  • Ramchand, L. — Susmel, R. (1998): Variance and Covariances of International Stock Returns: The International Capital Asset Pricing Model Revisited. Journal of International Financial Markets, Institutions and Money, 8(1): 39–57.

    Susmel R. , 'Variance and Covariances of International Stock Returns: The International Capital Asset Pricing Model Revisited ' (1998 ) 8 Journal of International Financial Markets, Institutions and Money : 39 -57.

    • Search Google Scholar
  • De Santis, G. — Gerard, B. (1997): International Asset Pricing and Portfolio Diversification with Time-varying Risk. Journal of Finance, 52(5): 1881–1912.

    Gerard B. , 'International Asset Pricing and Portfolio Diversification with Time-varying Risk ' (1997 ) 52 Journal of Finance : 1881 -1912.

    • Search Google Scholar