TITLE:
Asymmetric Response of Public Utility Stock Returns Volatility to Up and Down Markets and Deregulation
AUTHORS:
Richard A. Michelfelder
KEYWORDS:
Asymmetric Stock Returns, Electric Utilities, Deregulation, Robust Estimation, Buffering Effect, Skewed Generalized T Distribution
JOURNAL NAME:
Journal of Mathematical Finance,
Vol.8 No.3,
August
16,
2018
ABSTRACT: This investigation researches how industry institutional regimes can affect the
pattern and volatility of stock prices and returns. This paper searches for information
signals of regulatory policy in US electric public utility company
stock returns and also tests for volatility changes from the buffering effect
from deregulation. Utility stock returns asymmetry in up and down markets
is modeled for evidence of investor information signals of regulatory behavior.
Lax regulation should lead to utility stock returns that react strongly to
up markets due to weakly-constrained expected upside profits. Utility stock
returns should have a small response to down markets. Stringent regulation
should generate the opposite result. Since stock returns distributions typically
have skewness and kurtosis, this study applies flexible probability density
function (pdf) regressions methods that accommodate skewness and kurtosis.
This paper concludes that since utility stock returns have a strong response to
down markets relative to up markets, there is down market asymmetry in
price and returns volatility. This evidence suggests that investors perceive that
utility profit regulation is stringent. It also suggests, surprisingly, that the
buffering effect has been increased with deregulation. Lastly, robust estimation
of financial models performed herein shows that regression estimation
should not assume a normally distributed error term.