Asymmetric Business Cycle Effects on US Sectoral Stock Returns
Keran S* and Prasad VB
Department of Economics, Florida International University, Miami, Florida, USA
- *Corresponding Author:
- Keran Song, PhD Scholar
Department of Economics
Florida International University, USA
Tel: +1 305-348-2000
E-mail: [email protected]
Received date: September 14, 2015; Accepted date: September 22, 2015; Published date: September 28, 2015
Citation: Keran S, Prasad VB (2015) Asymmetric Business Cycle Effects on US Sectoral Stock Returns. Int J Econ Manag Sci 4:289. doi: 10.4172/2162-6359.1000289
Copyright: © 2015 Keran S, et al. This is an open-access article distributed under the terms of the Creative Commons Attribution License, which permits unrestricted use, distribution, and reproduction in any medium, provided the original author and source are credited.
Two models are developed in this paper in order to discuss possible asymmetric business cycle effects on US sectoral stock returns. One is a GARCH model with asymmetric explanatory variables and the other one is an ARCH-M model with asymmetric external regressors. In the second model, square root of conditional variance of the business cycle proxy is characterized as positive or negative risk, depending on the algebraic sign of past innovations driving the business cycle proxy. This helps to capture any asymmetric effects of positive and negative business cycle risk on returns. We find that some sectors change their cyclicities from expansions to recessions. Negative shocks to business cycles have most power to influence sectoral volatilities. Positive and negative parts of business cycle risk have same effects on some sectors but have opposite effects on other sectors. A general conclusion of both models is that business cycles has stronger effects than own sectoral effects in driving sectoral returns.