Applying generalized autoregressive conditional heteroscedasticity models to model univariate volatility

Islam, Mohd Aminul (2014) Applying generalized autoregressive conditional heteroscedasticity models to model univariate volatility. Journal of Applied Sciences, 14 (7). pp. 641-650. ISSN 1812-5662 (O), 1812-5654 (P)

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Abstract

This paper aims to model volatility of daily index returns for four Asian markets namely; Kuala Lumpur Composite Index of Malaysia, Jakarta Stock Exchange Composite Index of Indonesia, Straits Times Index of Singapore and the Stock Index of Korea over the period 03/01/2007 – 31/07/2013 excluding the public holidays. We utilized generalized autoregressive conditional heteroskedasticity models as these models are particularly suitable for high frequency financial time series such as the daily stock returns which has a time-varying variance. Unlike the linear structural models, these models are found very useful in explaining the most stylized facts about index returns such as leptokurtosis, volatility clustering and asymmetric or leverage effects. The key results of this study are as follows. Firstly, the conditional variance process is highly persistent in all markets. Secondly, the relationship between the expected risk and the expected return is positive as expected but the relationship is not statistically significant for all markets except Indonesia. For Indonesian market which is found to be more volatile than the other three markets, the estimated coefficient of risk premium appeared to be statistically significant indicating that increased risk leads to a rise in the returns. The risk-premium coefficients for other three markets are although positive but not statistically significant suggesting that increased risk does not necessarily produce higher return for those three markets. Finally, the asymmetric effects is exist in all cases signifying that negative shock produces higher impact on future volatility than the positive shock of the same magnitude.

Item Type:	Article (Journal)
Additional Information:	5651/36034
Uncontrolled Keywords:	votality, GARCH models, financial time series, KLCI, leverage effects
Subjects:	H Social Sciences > HG Finance > HG4501 Stocks, investment, speculation
Kulliyyahs/Centres/Divisions/Institutes (Can select more than one option. Press CONTROL button):	Kulliyyah of Science > Department of Computational and Theoretical Sciences
Depositing User:	Dr Aminul Islam
Date Deposited:	12 Mar 2014 16:36
Last Modified:	29 Apr 2015 13:21
URI:	http://irep.iium.edu.my/id/eprint/36034

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