Volume 3, Number 3 / September , Pages 147-221
Dynamic and Stochastic Instability and the Unbiased Forward Rate Hypothesis: A Variable Mean Response Approach
Multinational Finance Journal, 1999, vol. 3, no. 3, pp. 173-221
Winston T. Lin , State University of New York at Buffalo, U.S.A.    Corresponding Author

This paper examines how determinants of volatility and stock returns change with financial crisis. The contributions of the paper are twofold. First, using a GARCH-M framework, risk and return are jointly modeled by using macroeconomic variables both in the variance and the mean equations. The conditional variance equation is specified by including macro-economic variables, a relevant information set for emerging economies, that is often overlooked in various GARCH specifications. Second, determinants of risk and return are investigated before during and after a major financial crisis at ISE. We show that, both the determinants of risk and the risk-return relationship change as the economy switches from one regime to the other.

Keywords : currency betas; five special tests; four-step generalized least squares; mean and variance shifts; the unbiasedness hypothesis; variable-mean-response random coefficients models
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