Between The Rock and a Hard Place: Regime Switching in the RelationshipBetween Short-Term Interest Rates and Equity Returns in the UK

We examine the relationship between short term interest rates and UK equity returns using a two regime Markov Switching EGARCH model. We find one high-return, low variance regime in which the conditional variance of equity returns responds persistently but symmetrically to equity return innovations. In the other, low-mean, highvariance, regime there is evidence that equity volatility responds asymmetrically and without persistence to shocks to equity returns. There is evidence of a regime dependent relationship between shorter maturity interest rate differentials and equity return volatility. Furthermore, there is evidence that events in the money markets influence the probability of transition across regimesRegime switching; Time varying transition probabilities; Newsimpact surfaces; Asymmetric volatility; Interest Rate Spreads

The Impact of Short Selling on the Price–Volume Relationship: Evidence from Hong Kong

This paper considers the relationship between traded volume and volatility. We employ short sales data to discriminate between transactions that close existing long positions and transactions that establish new short positions. We test for, and where appropriate, incorporate non–linearity and asymmetry into the modelling process. The evidence supports a non-linear, bi-directional relationship between volume and volatility. The results suggest (i) that the market displays greater volatility following a period of short selling and (ii) that asymmetric responses to positive and negative innovations to returns appear to be exacerbated by short selling.

TIME VARIATION AND ASYMMETRY IN THE WORLD PRICE OF COVARIANCE RISK: THE IMPLICATIONS FOR INTERNATIONAL DIVERSIFICATION

The International Capital Asset Pricing Model measures country risk in terms of the conditional covariance of national returns with the world return. Using impulse responses from a multivariate nonlinear model we provide evidence of time variation and asymmetry in the measure of country risk. and the implied benefit to international diversification. The evidence implies that the price of risk and the benefits from diversification may differ in a statistically and economically meaningful fashion across bull and bear markets.Generalised Impulse Responses; Asymmetry; International Capital Asset Pricing Model.

Non-linear Co-Movements in Output Growth: Evidence from the United States and Australia

This paper investigates comovements between the United States and Australia. Our nonlinear model allows the dynamic response to shocks to differ if countries are in recession. Generalised Impulse Response Functions highlight a significant asymmetric response to positive and negative shocks.Current Depth of Recession Models, Generalised Impulse Response Functions, Asymmetries

Testing for Rate-Dependence and Asymmetry in Inflation Uncertainty:Evidence from the G7 Economies

The Friedman-Ball hypothesis implies a link between the inflation rate and inflation uncertainty. In this paper we employ a new test for the joint null hypothesis of no dependence effects and no asymmetry in the G7 inflation volatility. The results show that higher inflationrates operate additively via the conditional variance of inflation to induce greater inflation uncertainty in the U.S., U.K. and Canada. In addition, positive inflationary shocks are found to generate greater inflation uncertainty than negative shocks of a similar magnitude in the U.K. and Canada.Friedman-Ball hypothesis, Asymmetry, Davies’ Problem

Equity Return and Short-Term Interest Rate Volatility : Level Effects and Asymmetric Dynamics

Evidence suggests that short-term interest rate volatility peaks with the level of short rates, while equity volatility responds asymmetrically to positive and negative shocks. We present an LM based test that distinguishes between level effects and asymmetry in volatility which is robust to the presence of unidentified nuisance parameters under the null. There is strong evidence of a level effect and asymmetric response in the relationship between S&P 500 Index returns and 3-month US Treasury Bills. The conditional covariance depends on the level of the short rate which has implications for hedging equity returns against short term interest rate movements.Level Effects; Asymmetry; LM Tests; Davies Problem; Nonlinear Granger Causality

The Asymmetric Effects of Uncertainty on Inflation and Output Growth

We study the effects of growth volatility and inflation volatility on average rates of output growth and inflation for post-war U.S. data. Our results suggest that growth uncertainty is associated with higher average growth and lower average inflation. Inflation uncertainty is significantly negatively correlated with both output growth and average inflation. Both inflation and growth display evidence of significant asymmetric response to positive and negative shocks of equal magnitude.growth, inflation, uncertainty, asymmetry, generalised impluse response functions

Time Variation and Asymmetry in the World Price of Covariance Risk: The Implications for International Diversification

The International Capital Asset Pricing Model measures countryrisk in terms of the conditional covariance of national returns withthe world return. Using impulse responses from a multivariate nonlinearmodel we provide evidence of time variation and asymmetry inthe measure of country risk. and the implied benefit to internationaldiversification. The evidence implies that the price of risk and the benefitsfrom diversification may differ in a statistically and economicallymeaningful fashion across bull and bear markets