The asymmetric reactions of mean and volatility of stock returns to domestic and international information based on a four-regime double-threshold GARCH model

In this paper, we investigate the asymmetric reactions of mean and volatility of stock returns in five major markets to their own local news and the US information via linear and nonlinear models. We introduce a four-regime Double-Threshold GARCH (DTGARCH) model, which allows asymmetry in both the conditional mean and variance equations simultaneously by employing two threshold variables, to analyze the stock markets’ reactions to different types of information (good/bad news) generated from the domestic markets and the US stock market. By applying the four-regime DTGARCH model, this study finds that the interaction between the information of domestic and US stock markets leads to the asymmetric reactions of stock returns and their variability. In addition, this research also finds that the positive autocorrelation reported in the previous studies of financial markets may in fact be mis-specified, and actually due to the local market's positive response to the US stock market.