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Predicting Extreme Returns in the Canadian Stock Market


Predicting Extreme Returns in the Canadian Stock Market

Zhao, Yun (2016) Predicting Extreme Returns in the Canadian Stock Market. Masters thesis, Concordia University.

Text (application/pdf)
Zhao_MSc_S2016.pdf - Accepted Version


This study examines the relationship between volatility and the probability of occurrence of expected extreme returns in the Canadian market. Three measures of volatility are examined: implied volatility from firm option prices, conditional volatility calculated using an EGARCH model and idiosyncratic volatility based on the Fama and French five-factor model. A significantly positive relationship is observed between a firm’s idiosyncratic volatility and the probability of occurrence of an extreme return in the subsequent month for firms. A 10% increase in idiosyncratic volatility in a given month is associated with the probability of an extreme shock in the subsequent month (top or bottom 1.5% of the returns distribution) of 26.4%. Other firm characteristics, including firm age, price, volume and Book-to-Market ratio, are also shown to be significantly related to subsequent firm extreme returns. The effects of conditional and implied volatility are mixed.

Keywords: Extreme return; Implied volatility; Conditional volatility; Idiosyncratic volatility; Five-Factor model; Probit regression;
JEL Codes: G10, G11, G14, G17

Divisions:Concordia University > John Molson School of Business > Finance
Item Type:Thesis (Masters)
Authors:Zhao, Yun
Institution:Concordia University
Degree Name:M. Sc.
Program:Administration (Finance option)
Date:1 March 2016
Thesis Supervisor(s):Switzer, Lorne
ID Code:981171
Deposited By: YUN ZHAO
Deposited On:17 Jun 2016 14:36
Last Modified:18 Jan 2018 17:52
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