The purpose of the study is to examine the dynamics in the troika of asset pricing, volatility, and the business cycle in the US and Japan.
The study uses a six-factor asset pricing model to derive the realized volatility measure for the GARCH-type models.
The comprehensive empirical investigation led to the following conclusion. First, the results infer that the market portfolio and human capital are the primary discounting factors in asset return predictability during various phases of the subprime crisis phenomenon for the US and Japan. Second, the empirical estimates neither show any significant impact of past conditional volatility on the current conditional volatility nor any significant effect of subprime crisis episodes on the current conditional volatility in the US and Japan. Third, there is no asymmetric volatility effect during the subprime crisis phenomenon in the US and Japan except the asymmetric volatility effect during the post-subprime crisis period in the US and full period in Japan. Fourth, the volatility persistence is relatively higher during the subprime crisis period in the US, whereas during the subprime crisis transition period in Japan than the rest of the phases of the subprime crisis phenomenon.
The study argues that the empirical investigations that employed the autoregressive method to derive the realized volatility measure for the parameter estimation of GARCH-type models may result in incurring spurious estimates. Further, the empirical results of the study show that using the six-factor asset pricing model in an intertemporal framework to derive the realized volatility measure yields better estimation results while estimating the parameters of GARCH-type models.
The corresponding author acknowledges that the present work is the part of unpublished doctoral dissertation “Essays in asset pricing, human capital, volatility, and economic growth nexus: The world evidence.”Availability of data: The data that support the findings of this study are available from the corresponding author upon reasonable request.Conflict of interest statement: The authors declare that there is no conflict of interest.
Roy, R. and Shijin, S. (2020), "The nexus of asset pricing, volatility and the business cycle", Journal of Economic Studies, Vol. ahead-of-print No. ahead-of-print. https://doi.org/10.1108/JES-08-2019-0357Download as .RIS
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