HELENA CHULIÁ AND HIPÒLIT TORRÓ 351accommodatesboththesignandthemagnitudeofreturninnovations. More-
over, the volatility feedback effect is explored as a possible explanation for
asymmetric volatility in stock returns.
We have obtained three important results. First, the estimated price of risk
is positive and significant in the three countries. This result indicates that
the risk is valued and is consistent with the volatility feedback hypothesis.
If volatility is priced, an anticipated increase in volatility raises the required
return on equity, leading to an immediate stock price decline. Therefore,
time-varying risk premiums will be observed. Moreover, the asymmetric
behavior of variances and covariances has been shown; both increase more
after negative than after positive shocks.
Second, we find consistent evidence that volatility spillovers between
large and small firms are bidirectional in the three countries, as Chuliá and
Torró (2006) and Pardo and Torró (2005) find in the Spanish market. More-
over, news coming from the small cap index increases more the volatility
of the large cap index than the opposite, especially, bad news. This result
adds evidence against the common conclusion according to which volatility
spillovers are unidirectional, from large firms to small ones, and shows that
news on small firms can also cause volatility in their own returns and in
large firm returns.
Finally, the study uncovers that conditional beta coefficient estimates
within the model are insensitive to sign and size asymmetries in unexpected
shock returns, and that the unconditional beta estimate has a significant
specification error. Therefore, for dynamic portfolio management it is nec-
essary to use conditional models in order to avoid specification errors on
estimating beta coefficients.
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