Response of Market Returns to Inflation News: Asymmetry Based on the Level of Inflation

Using daily data we look at S&P500 returns to inflation news during the period 1980-2002, where we categorize the data into sub-periods based on the level of inflation and the phase of economic cycle. We find that although stock market’s reaction to inflation news is generally negative, the response appears to depend on the level of prevailing inflation and phase of the business cycle. Specifically, we find that on the day of inflation announcement daily returns during periods of low inflation and low risks of recession respond positively to inflation news in recessionary states. Our results show that while high inflation weighs on market returns, low inflation creates positive returns opportunities when the economy faces low risks of recession. Asymmetric response of daily returns to inflation news depending on the level of inflation is an interesting novel finding.

Asset Pricing Behaviour with Dual-Beta in Case of Pakistani Stock Market

This study investigates the dynamics of beta by the asymmetric response of beta to bullish and bearish market environment on 50 stocks traded in Karachi Stock Exchange during 1993-2007. The results show that the betas increase (decrease) when the market is bullish (bearish). The results however suggest that investors receive a positive premium for accepting down-side risk, while a negative premium is associated with up-market beta. The results suggest that the conditional Fama and French three factor model has performed better than the conditional CAPM when news asymmetry was taken into account compared with the unconditional Fama and French three factor model and the unconditional dual-beta CAPM in explaining the relationship in beta and returns in case of Pakistani market. JEL classification: G12, G15 Keywords: Beta Instability, High Market Beta, Low Market Beta, EGARCH Model, News Asymmetry, Fama and French Three Factor Model