Asymmetries of stock price dynamics: An application of hidden cointegration technique

The purpose of this paper is to examine stock market efficiency, via stock price dynamics mechanisms between stock market prices of big and small capitalization companies in U.K. We decomposed stock prices into positive and negative components and we applied the Granger and Yoon (2002) hidden co-integration method which helps to reveal possible relationships between positive and negative components of time series, as stock returns. We followed this approach based on the well documented fact in behavioural finance literature, that investors’ decisions are different between the profit and the losses equivalents, and thus investors’ decisions may be influenced by the market positive or negative swings as well as the specific market characteristics i.e. big and small cap markets. According to our statistical results there is a dynamic relationship between the negative components of the stock price series and the estimated statistical models indicate that the small capitalization negative returns drive the shocks of the big capitalization negative returns.