MODELING ASYMMETRY IN STOCK RETURNS BY A THRESHOLD AUTOREGRESSIVE CONDITIONAL HETEROSCEDASTIC MODEL

Possible asymmetric behaviour of stock prices during bear and bull markets are studied by using a threshold type non-linear time series model with conditional heteroscedastic variance. Using Hong Kong data it is demonstrated that the return series could have a conditional mean structure which depends on the rise and fall of the market on a previous day. The findings also shed some light on why it could be difficult to reject the efficient market hypothesis. The threshold model with conditional changing variance is also of interest in other financial applications.