Market news co-moments and currency returns
- PDF / 669,685 Bytes
- 45 Pages / 439.37 x 666.142 pts Page_size
- 71 Downloads / 184 Views
Market news co-moments and currency returns Mohammadreza Tavakoli Baghdadabad1
· Girijasankar Mallik2
Received: 22 February 2019 / Accepted: 22 September 2020 © Springer-Verlag GmbH Germany, part of Springer Nature 2020
Abstract We propose three co-moments of the market returns’ cash-flow, and discount-rate shocks and examine empirically an intertemporal capital asset pricing model using the co-moments on currency returns as well as stock returns during Dec. 1983 to Dec. 2017. We find that our proposed model has explanatory power for both currency and stock portfolios. We find several common sources of market risk in currency and stock returns that are reflected in market news. Our findings show that the co-moments are related to currency risk premiums and outperform the well-known liquidity, dollar and HML risk factors. Keywords Market news · Cash-flow · Discount rate · Risk co-moments JEL Classification G12 · G32
1 Introduction One of the most important challenges in finance is to link asset returns with market risk factors. The literature shows that the existing market risk factors and their derived pricing models cannot exhibit jointly explanatory power for both currency and stock returns (Lettau et al. 2014; Atanasov and Nitschka 2015). It shows that the popular models developed for a specific asset class fail to price other asset classes (Lettau et al. 2014). To address this issue, Atanasov and Nitschka (2015) propose that the
Electronic supplementary material The online version of this article (https://doi.org/10.1007/s00181-02 0-01951-y) contains supplementary material, which is available to authorized users.
B
Mohammadreza Tavakoli Baghdadabad [email protected] Girijasankar Mallik [email protected]
1
Australian National Institute of Management and Commerce (IMC), Sydney, Australia
2
Business School, Western Sydney University, Sydney, Australia
123
M. T. Baghdadabad, G. Mallik
risk factors generated by the unexpected market returns’ decomposition into cashflow and discount-rate shocks have a joint explanatory power for both currency and stock returns. They find that the covariance between stock and currency returns and that these two shocks can explain variation in the cross section of the returns. Kalev et al. (2019) also develop an intertemporal capital asset pricing model (ICAPM) based on only market news co-skewness and show that their proposed co-skewness and the market news second moments of Atanasov and Nitschka (2015) are priced in the stock market. However, Jean (1971), Scott and Horvath (1980), Rubinstein (1973), and Kraus and Litzenberger (1976) believe that if asset returns have an asymmetric distribution, asset returns’ moments (i.e., skewness and kurtosis) influence maximizing investors’ expected utility. They propose the higher-moment CAPM model by linking asset returns to all moments of market returns. Christie-David and Chaudhry (2001) explain that investors’ expected utility depends on all of the distribution’s moments and note that higher moments should be
Data Loading...
