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  • HACking at Non-Linearity: Evidence from Stocks and Bonds

    Author(s)
    J. Bianchi, Robert
    E. Drew, Michael
    E. Clements, Adam
    Griffith University Author(s)
    Bianchi, Robert
    Drew, Michael E.
    Year published
    2008
    Metadata
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    Abstract
    The implicit assumption of linearity is an important element in empirical finance. This study presents a hypothesis testing approach which examines the linear behaviour of the conditional mean between stock and bond returns. Conventional tests detect spurious non-linearity in the conditional mean caused by heteroskedasticity and/or autocorrelation. This study re-states these tests in a heteroskedasticity and autocorrelation consistent (HAC) framework and we find that stock and bond returns are indeed linear-in-the-mean in both univariate and bivariate settings. This study contends that previous research has detected ...
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    The implicit assumption of linearity is an important element in empirical finance. This study presents a hypothesis testing approach which examines the linear behaviour of the conditional mean between stock and bond returns. Conventional tests detect spurious non-linearity in the conditional mean caused by heteroskedasticity and/or autocorrelation. This study re-states these tests in a heteroskedasticity and autocorrelation consistent (HAC) framework and we find that stock and bond returns are indeed linear-in-the-mean in both univariate and bivariate settings. This study contends that previous research has detected spurious non-linearity due to size distortions caused by heteroskedasticity and autocorrelation, rather than the presence of a genuine non-linear relationship between stock and bond returns.
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    Conference Title
    16th Annual Conference on Pacific Basin Finance Economics Accounting Management (PBFEAM)
    Publisher URI
    https://www.qut.edu.au/
    Publication URI
    http://hdl.handle.net/10072/32572
    Collection
    • Conference outputs

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