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Asymmetries in Stock Returns: Statistical Tests and Economic Evaluation

Yongmiao Hong1,2; Jun Tu3; Guofu Zhou4

1 Cornell University · 2 Xiamen University · 3 Singapore Management University · 4 Washington University and CCFR

Review of Financial Studies 2007

We provide a model-free test for asymmetric correlations in which stocks move more often with the market when the market goes down than when it goes up, and also provide such tests for asymmetric betas and covariances. When stocks are sorted by size, book-to-market, and momentum, we find strong evidence of asymmetries for both size and momentum portfolios, but no evidence for book-to-market portfolios. Moreover, we evaluate the economic significance of incorporating asymmetries into investment decisions, and find that they can be of substantial economic importance for an investor with a disappointment aversion (DA) preference as described by Ang, Bekaert, and Liu (2005).

DOI
10.1093/rfs/hhl037
Volume
20 (5)
Pages
1547-1581
Language
en
Export
BibTeX
Sources
crossref openalex