Role of Information Shocks in Predicting Equity Returns: A Comparison of Asian Developed and Asian Emerging Markets

Abstract

This study is initiated to identify the presence of jumps in Asian developed and Asian emerging markets and to examines the role of jumps specifically positive and negative jumps in predicting equity returns of Asian developed and Asian emerging markets. Furthermore, it explores the connection between factor premia and jumps returns for Asian developed and Asian emerging markets and finally, it provides insight into integrated volatility during periods of positive and negative jumps for Asian developed and Asian emerging markets. To accomplish the purpose, the swap variance (SwV) approach is used in this study to identify monthly price jumps and realized volatility is estimated using daily equity market data from February 2001 to February 2020 for both Asian developed and Asian emerging markets. Then returns during jump periods are calculated and compare with returns during non-jump periods for both Asian developed and Asian emerging markets and compare both markets. Furthermore, Fama and French five factors are regressed on jump returns to identify which factors of the Fama and French five-factor model are connected with jump returns in Asian developed and Asian emerging markets. Finally, integrated volatility during jump periods are estimated and compare with integrated volatility during non-jump periods for both Asian developed and Asian emerging markets and compare both markets. The finding shows that jumps play an important role in equity returns and integrated volatility of Asian developed and Asian emerging markets. Returns during the jump period are higher than non-jump periods. Furthermore, Jumps occur in all equity markets; however, in emerging markets, jumps are more frequent than in developed markets, whereas it is worth noted that positive jumps are more frequent than negative jumps in both markets. Furthermore, during jump periods, the markets with average volatility earn higher returns in emerging markets whereas, in developed markets, highly volatile markets earn higher returns during jumps periods. Moreover, markets with low returns and high volatility during normal periods are more adversely affected during periods of negative jumps in both markets. Furthermore, this study reveals that in the context of Asian developed markets, all the five factors of the Fama and French five factor model explain positive jump returns, x whereas in the context of Asian emerging markets, only market premium and investment premium explain positive jump returns. Similarly, market premium, profitability premium, and investment premium explain negative jump returns in Asian developed markets, whereas market premium, size premium, value premium, and investment premium explain negative jump returns in Asian emerging markets. Moreover, the study finds that TPV is a better estimation technique of continuous components of quadratic variation as compare with bipower (BPV). It is because that the BPV overstate the average integrated volatility whereas TPV has a minimum mean value and minimum standard deviation and this pattern is consistent across all Asian developed and Asian emerging markets. Furthermore, both Asian developed markets and Asian emerging markets have high volatility during 2001 and during the 2007-2009 global financial crises periods. Integrated volatility is high during periods of negative jumps compared with periods during positive jumps and the pattern is consistent across Asian developed and Asian emerging markets. The ratio of variation due to jump component to total realized variance shows a considerable amount of variations in both Asian developed and Asian emerging markets. The findings of this study have implications for asset pricing models, risk management, individual investors, and portfolio managers in developed and emerging markets.