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RFS Advance Access originally published online on September 23, 2006
Review of Financial Studies 2007 20(5):1547-1581; doi:10.1093/rfs/hhl037
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Copyright © The Author 2007. Published by Oxford University Press on behalf of The Society for Financial Studies.

Asymmetries in Stock Returns: Statistical Tests and Economic Evaluation

Yongmiao Hong
Cornell University and Xiamen University

Jun Tu
Singapore Management University

Guofu Zhou
Washington University and CCFR

Address correspondence to Guofu Zhou, Olin School of Business, Washington University, St. Louis, MO 63130, or e-mail: zhou{at}wustl.edu

JEL: C12, C15, C32, G12


  Abstract

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).

We are grateful to Yacine Aït-Sahalia (the Editor), Andrew Ang, Joseph Chen (the ACFEA discussant), Robert Connolly, Alex David, Heber Farnsworth, Michael Faulkender, Raymond Kan, Hong Liu, Tom Miller, Lubos Pástor, Andrew Patton (the AFA discussant), and Bruno Solnik, seminar participants at Tsinghua University and Washington University in St. Louis, the 14th Annual Conference on Financial Economics and Accounting and 2004 American Finance Association Meetings for many helpful comments, and especially to an anonymous referee for numerous insightful and detailed comments that improved the article drastically. We also thank Lynnea Brumbaugh-Walter for many helpful editorial comments. Hong and Tu acknowledge financial support for this project from NSF Grant SES-0111769 and the Changjiang Visiting Scholarship of Chinese Ministry of Education, and from Singapore Management University Research Grant C207/MSS4B023, respectively. Zhou is grateful to China Center for Financial Research (CCFR) of Tsinghua University for visits in April 2005 and May 2006 where part of the article was written.


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