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Expected downside risk and asset prices: characteristics of emerging and developed European markets

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Abstract

This paper discusses an empirical analysis of the expected downside risk based asset-pricing model on Central and Eastern European and developed Western European markets. The investigated risk measure applies a nonparametric approach that allows getting rid of any assumption on the distribution of returns, moreover, as presented in this paper, captures risk and expected return with superior performance. Furthermore, we also show that dollar-denominated returns often indicate a better fit than regressions in local currency suggesting that international capital inflow does play an important role in asset prices. This latter finding is particularly significant on Developed European capital markets, which is in contradiction with the belief of international investors having a greater influence on emerging markets compared to developed ones.

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Acknowledgments

We are grateful to the conference participants at the Workshop on Behavioural Economics and Industrial Organization at Corvinus University, 2014. Mihály Ormos acknowledges the support by the János Bolyai Research Scholarship of the Hungarian Academy of Sciences. This research was partially supported by Pallas Athéné Domus Scientiae Foundation.

Author information

Authors and Affiliations

  1. Department of Finance, Budapest University of Technology and Economics, Magyar tudosok krt. 2, Budapest, 1117, Hungary

    Mihály Ormos & Dusán Timotity

Authors
  1. Mihály Ormos
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  2. Dusán Timotity
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Corresponding author

Correspondence to Mihály Ormos.

Appendix: R2 values of regressions separately for countries and time horizons

Appendix: R2 values of regressions separately for countries and time horizons

First, daily, weekly, monthly and yearly R2 values are presented for the case with α = 0 and local currency.

 

US

UK

Germany

France

Hungary

Poland

Czeck Rep.

Daily

 Vol

0.93

0.05

0.91

0.51

0.00

0.15

0.53

 Var

0.94

0.01

0.89

0.42

0.00

0.15

0.81

 Edr

0.91

0.04

0.90

0.49

0.03

0.20

0.60

 Beta

0.82

0.21

0.88

0.45

0.16

0.11

0.25

 Svar

0.89

0.01

0.90

0.31

0.05

0.15

0.53

 Dbeta

0.93

0.04

0.92

0.44

0.06

0.18

0.60

Weekly

 Vol

0.94

0.06

0.90

0.48

0.01

0.14

0.59

 Var

0.93

0.00

0.87

0.37

0.01

0.14

0.85

 Edr

0.93

0.03

0.87

0.44

0.06

0.18

0.69

 Beta

0.87

0.07

0.88

0.41

0.17

0.10

0.25

 Svar

0.87

0.06

0.85

0.31

0.10

0.14

0.80

 Dbeta

0.91

0.00

0.90

0.48

0.07

0.18

0.68

Monthly

 Vol

0.94

0.08

0.87

0.51

0.02

0.13

0.52

 Var

0.91

0.02

0.80

0.41

0.03

0.14

0.68

 Edr

0.86

0.01

0.78

0.32

0.10

0.22

0.77

 Beta

0.77

0.11

0.83

0.46

0.16

0.13

0.48

 Svar

0.77

0.03

0.68

0.27

0.10

0.15

0.78

 Dbeta

0.90

0.11

0.81

0.46

0.08

0.14

0.70

Yearly

 Vol

0.93

0.05

0.78

0.29

0.10

0.29

0.72

 Var

0.77

0.01

0.63

0.13

0.09

0.23

0.89

 Edr

0.13

0.37

0.02

0.05

0.53

0.54

0.96

 Beta

0.32

0.00

0.69

0.12

0.07

0.16

0.04

 Svar

0.79

0.00

0.63

0.17

0.06

0.25

0.81

 Dbeta

0.91

0.00

0.79

0.33

0.08

0.33

0.63

Second, the daily, weekly, monthly and yearly R2 values are presented for the case with α = 0 and dollar denominated returns.

 

US

UK

Germany

France

Hungary

Poland

Czeck Rep.

Daily

 Vol

0.93

0.06

0.83

0.30

0.05

0.00

0.54

 Var

0.94

0.01

0.81

0.23

0.05

0.00

0.83

 Edr

0.91

0.04

0.82

0.28

0.04

0.01

0.57

 Beta

0.82

0.18

0.80

0.26

0.00

0.00

0.27

 Svar

0.89

0.03

0.82

0.12

0.01

0.00

0.53

 Dbeta

0.93

0.07

0.84

0.22

0.02

0.00

0.62

Weekly

 Vol

0.94

0.07

0.83

0.35

0.03

0.01

0.55

 Var

0.93

0.01

0.80

0.26

0.01

0.01

0.82

 Edr

0.93

0.04

0.80

0.31

0.01

0.02

0.66

 Beta

0.87

0.08

0.82

0.28

0.00

0.01

0.30

 Svar

0.87

0.04

0.74

0.30

0.00

0.02

0.83

 Dbeta

0.91

0.12

0.81

0.36

0.02

0.01

0.76

Monthly

 Vol

0.94

0.01

0.81

0.30

0.03

0.01

0.57

 Var

0.91

0.02

0.77

0.22

0.01

0.02

0.81

 Edr

0.86

0.01

0.73

0.18

0.01

0.04

0.78

 Beta

0.77

0.00

0.78

0.27

0.00

0.00

0.40

 Svar

0.77

0.01

0.77

0.22

0.00

0.01

0.76

 Dbeta

0.90

0.01

0.81

0.31

0.02

0.00

0.65

Yearly

 Vol

0.93

0.00

0.49

0.01

0.01

0.18

0.79

 Var

0.77

0.05

0.38

0.00

0.02

0.14

0.92

 Edr

0.13

0.34

0.10

0.13

0.27

0.41

0.97

 Beta

0.32

0.06

0.44

0.00

0.00

0.07

0.14

 Svar

0.79

0.09

0.41

0.00

0.00

0.14

0.93

 Dbeta

0.91

0.00

0.49

0.01

0.01

0.16

0.75

Third, daily, weekly, monthy and yearly R2 values are presented for the case with α ≠ 0 and local currency.

 

US

UK

Germany

France

Hungary

Poland

Czeck Rep.

Daily

 Vol

0.59

0.60

0.08

0.00

0.10

0.01

0.77

 Var

0.63

0.62

0.09

0.00

0.10

0.02

0.87

 Edr

0.42

0.78

0.03

0.01

0.13

0.12

0.88

 Beta

0.00

0.19

0.01

0.03

0.24

0.02

0.12

 Svar

0.58

0.13

0.19

0.02

0.03

0.05

0.44

 Dbeta

0.52

0.18

0.19

0.01

0.16

0.04

0.58

Weekly

 Vol

0.62

0.72

0.08

0.01

0.00

0.01

0.78

 Var

0.69

0.72

0.08

0.01

0.00

0.02

0.89

 Edr

0.53

0.78

0.00

0.07

0.46

0.07

0.88

 Beta

0.17

0.52

0.04

0.06

0.29

0.02

0.11

 Svar

0.51

0.74

0.08

0.00

0.33

0.06

0.78

 Dbeta

0.45

0.77

0.08

0.01

0.29

0.05

0.76

Monthly

 Vol

0.60

0.55

0.01

0.00

0.06

0.00

0.62

 Var

0.63

0.59

0.02

0.00

0.05

0.02

0.66

 Edr

0.09

0.88

0.09

0.24

0.58

0.14

0.87

 Beta

0.02

0.06

0.00

0.01

0.36

0.00

0.43

 Svar

0.34

0.37

0.00

0.02

0.48

0.05

0.75

 Dbeta

0.39

0.16

0.00

0.01

0.40

0.01

0.74

Yearly

 Vol

0.45

0.24

0.00

0.02

0.00

0.07

0.81

 Var

0.44

0.26

0.00

0.04

0.01

0.08

0.87

 Edr

0.06

0.96

0.54

0.59

0.68

0.39

0.98

 Beta

0.16

0.19

0.00

0.07

0.00

0.01

0.20

 Svar

0.42

0.55

0.00

0.00

0.01

0.10

0.78

 Dbeta

0.37

0.63

0.00

0.00

0.00

0.11

0.70

Fourth, the daily, weekly, monthy and yearly R2 values are presented for the case with α ≠ 0 and dollar denominated returns.

 

US

UK

Germany

France

Hungary

Poland

Czeck Rep.

Daily

 Vol

0.59

0.61

0.02

0.02

0.00

0.02

0.79

 Var

0.63

0.63

0.02

0.03

0.00

0.02

0.89

 Edr

0.42

0.78

0.00

0.09

0.10

0.00

0.87

 Beta

0.00

0.12

0.00

0.09

0.30

0.03

0.16

 Svar

0.58

0.07

0.06

0.09

0.02

0.01

0.44

 Dbeta

0.52

0.10

0.08

0.07

0.14

0.01

0.57

Weekly

 Vol

0.62

0.67

0.00

0.03

0.14

0.01

0.73

 Var

0.69

0.69

0.00

0.03

0.12

0.00

0.85

 Edr

0.53

0.70

0.10

0.13

0.58

0.02

0.88

 Beta

0.17

0.43

0.00

0.12

0.33

0.01

0.20

 Svar

0.51

0.24

0.00

0.00

0.09

0.01

0.80

 Dbeta

0.45

0.74

0.04

0.00

0.32

0.02

0.75

Monthly

 Vol

0.60

0.66

0.00

0.06

0.12

0.00

0.70

 Var

0.63

0.66

0.01

0.06

0.11

0.01

0.82

 Edr

0.09

0.87

0.12

0.44

0.87

0.11

0.91

 Beta

0.02

0.66

0.01

0.08

0.27

0.05

0.32

 Svar

0.34

0.66

0.01

0.01

0.18

0.00

0.69

 Dbeta

0.39

0.64

0.00

0.02

0.18

0.00

0.65

Yearly

 Vol

0.45

0.78

0.13

0.05

0.00

0.00

0.84

 Var

0.44

0.81

0.12

0.06

0.01

0.01

0.89

 Edr

0.06

0.98

0.86

0.60

0.69

0.25

0.98

 Beta

0.16

0.79

0.09

0.11

0.01

0.09

0.00

 Svar

0.42

0.77

0.07

0.04

0.00

0.01

0.90

 Dbeta

0.37

0.73

0.10

0.03

0.00

0.01

0.84

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Ormos, M., Timotity, D. Expected downside risk and asset prices: characteristics of emerging and developed European markets. Empirica 44, 529–546 (2017). https://doi.org/10.1007/s10663-016-9329-3

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