Asymmetric risk and return: Evidence from the Australian Stock Exchange

This paper examines volatility asymmetry in a financialmarket using a stochastic volatility framework. We use theMCMCmethod for model estimations. There is evidence of volatility asymmetry in the data. Our asymmetric stochastic volatility inmeanmodel,which nests both asymmetric stochastic volatility (ASV) and stochastic volatility inmeanmodels (SVM), indicates ASV sufficiently captures the risk-return relationship; therefore, augmenting it with volatility in mean does not improve its performance. ASV fits the data better and yields more accurate out-of-sample forecasts than alternatives. We also demonstrate that asymmetry mainly emanates from the systematic parts of returns. As a result, it is more pronounced at the market level and the volatility feedback effect dominates the leverage effect.