Downside Risk and Stock Returns: An Empirical Analysis of the Long-Run and Short-Run Dynamics from the G-7 Countries

This paper This paper This paper This paper presents presents presents a fractionally cointegrata fractionally cointegrata fractionally cointegrat a fractionally cointegrata fractionally cointegrata fractionally cointegrat a fractionally cointegrat a fractionally cointegrat a fractionally cointegrata fractionally cointegrata fractionally cointegrata fractionally cointegrat a fractionally cointegrata fractionally cointegrat a fractionally cointegrated vector autoregression ed vector autoregression ed vector autoregression ed vector autoregression ed vector autoregression ed vector autoregression ed vector autoregression ed vector autoregression ed vector autoregression ed vector autoregression ed vector autoregression (FCVAR) (FCVAR) (FCVAR) (FCVAR) model to examine to examine to examine to examine to examine to examine to examine various relations various relations various relations various relations various relations between stock returns and downside risk between stock returns and downside risk between stock returns and downside riskbetween stock returns and downside risk between stock returns and downside risk between stock returns and downside risk between stock returns and downside risk between stock returns and downside riskbetween stock returns and downside risk between stock returns and downside risk between stock returns and downside risk between stock returns and downside risk . Evidence from major advance Evidence from major advance Evidence from major advanceEvidence from major advanceEvidence from major advance Evidence from major advanceEvidence from major advance Evidence from major advance Evidence from major advanceEvidence from major advanceEvidence from major advance Evidence from major advance Evidence from major advanced markets markets markets markets markets supports the supports the notion that notion that notion that downside risk measured by measured by measured by measured by measured by measured by measured by value value value-at -risk ( risk (VaRVaRVaR) has significant information has significant information has significant information has significant information has significant information has significant information has significant information has significant information has significant information has significant information has significant information content content that reflects that reflects that reflects that reflects that reflects lagged long lagged long lagged longlagged long lagged long -run variance and run variance and run variance and run variance and run variance and run variance and run variance and run variance and run variance and higher momentshigher moments higher moments higher moments higher moments higher momentshigher moments of risk for for predict redict ing stock returns. stock returns. stock returns. stock returns. The e The e vidence vidence vidence supports the positive tradeoff hypothesis positive tradeoff hypothesis positive tradeoff hypothesis positive tradeoff hypothesis positive tradeoff hypothesis positive tradeoff hypothesis positive tradeoff hypothesis positive tradeoff hypothesispositive tradeoff hypothesis positive tradeoff hypothesis positive tradeoff hypothesis and and the leverage effect leverage effect leverage effectleverage effectleverage effect leverage effectleverage effectleverage effectleverage effectleverage effect in the long in the long in the long run and and for for some markets in the short run. some markets in the short run. some markets in the short run. some markets in the short run. some markets in the short run. some markets in the short run. some markets in the short run. some markets in the short run.some markets in the short run. We find that US downside risk accounts for 54.36% of price discovery, We find that US downside risk accounts for 54.36% of price discovery, We find that US downside risk accounts for 54.36% of price discovery, We find that US downside risk accounts for 54.36% of price discovery, We find that US downside risk accounts for 54.36% of price discovery, We find that US downside risk accounts for 54.36% of price discovery, We find that US downside risk accounts for 54.36% of price discovery, We find that US downside risk accounts for 54.36% of price discovery, We find that US downside risk accounts for 54.36% of price discovery, We find that US downside risk accounts for 54.36% of price discovery, We find that US downside risk accounts for 54.36% of price discovery, We find that US downside risk accounts for 54.36% of price discovery, We find that US downside risk accounts for 54.36% of price discovery, We find that US downside risk accounts for 54.36% of price discovery, We find that US downside risk accounts for 54.36% of price discovery, We find that US downside risk accounts for 54.36% of price discovery, We find that US downside risk accounts for 54.36% of price discovery, We find that US downside risk accounts for 54.36% of price discovery, We find that US downside risk accounts for 54.36% of price discovery, We find that US downside risk accounts for 54.36% of price discovery, We find that US downside risk accounts for 54.36% of price discovery, We find that US downside risk accounts for 54.36% of price discovery, We find that US downside risk accounts for 54.36% of price discovery, We find that US downside risk accounts for 54.36% of price discovery, We find that US downside risk accounts for 54.36% of price discovery, We find that US downside risk accounts for 54.36% of price discovery, We find that US downside risk accounts for 54.36% of price discovery, We find that US downside risk accounts for 54.36% of price discovery, whereas the whereas the whereas the whereas the own effect from own effect from own effect from own effect from own effect from own effect from own effect from the country itself contributes the country itself contributes the country itself contributes the country itself contributes the country itself contributes the country itself contributes the country itself contributes the country itself contributes the country itself contributes the country itself contributes the country itself contributes only only only 27.06%. 27.06%.