An Application of GARCH while investigating volatility in stock returns of the World.

Subhani, Muhammad Imtiaz and Hasan, Syed Akif and Osman, Ms. Amber (2012): An Application of GARCH while investigating volatility in stock returns of the World. Published in: South Asian Journal of Management Sciences , Vol. 5, No. 2 (2012): pp. 49-59.

Abstract

A healthy stock market is a sign of sound and healthy economy. Stock market is a volatile market affected, at times directly and most often indirectly, by many micro and macroeconomic players. Of these players interest rates and exchange rates are among the ones undertaken in this study. The rationale behind this study is to ascertain the volatility in stock returns of various stock exchanges in relevance to interest rates and exchange rates over a range of 8 countries for assorted periods. GARCH (1, 1) was deployed for investigating the possible eventualities of volatilities of stock markets. The findings were found varying for Pakistan, India, Hong Kong, Japan, United States, United Kingdom, Spain and Germany. Moreover, almost for all countries GARCH (1, 1) yielded significant results confirming the existence of volatility of stock markets for the current period of outlined countries due to volatility of those stock markets during the previous lags. The findings may help investors know the stock markets’ trends which are also for some cases (nations) affected by interest rates and/or exchange rates and thus to invest accordingly.

• Item Type: MPRA Paper
• Language: English
• Keywords: ARCH, GARCH, Volatility, AR-Process, Conditional Hetroskedecity.
• Subjects: B - History of Economic Thought, Methodology, and Heterodox Approaches > B2 - History of Economic Thought since 1925 > B23 - Econometrics ; Quantitative and Mathematical Studies; R - Urban, Rural, Regional, Real Estate, and Transportation Economics > R5 - Regional Government Analysis > R53 - Public Facility Location Analysis ; Public Investment and Capital Stock

References

Adjasi, C. K. D. (2009). Macroeconomic uncertainty and conditional stock-price volatility in frontier African markets-Evidence from Ghana. The Journal of Risk Finance, 10(4), 333-349.

Ahmed, S. (2008). Aggregate economic variables and stock market in India. International Journal of Finance & Economics, 14, 144-64.

Baillie, R. T., & DeGennaro, R. P. (1990). Stock Returns and Volatility. Journal of Financial and Quantitative Analysis, 25, 203-214.

Bollerslev, T. (1986). Generalized autoregressive conditional Heteroskedasticity. Journal of Econometrics, 31, 307-327.

Brooks, R.D., Iorio, A., Faff, R.W., Fry, T., & Joymungul, Y. (2010). Asymmetry and time variation in exchange rate exposure: An investigation of Australian stocks returns. International Journal of Commerce and Management, 20(4), 276-295.

Choi, J. J., Elyasiani, E., & Kopecky, K. J. (1992). The Sensitivity of Bank Stock Returns to Market, Interest and Exchange Rate Risks. Journal of Banking and Finance, 16, 983- 1004.

Coleman, A. K., & Tettey, K.F.A. (2008). Impact of macroeconomic indicators on stock market performance: The case of the Ghana Stock Exchange. The Journal of Risk Finance, 9(4), 365-378.

El-Masry, A. A. (2006). The exchange rate exposure of UK nonfinancial companies: industry level analysis. Managerial Finance, 32(2), 115-136.

Elyasiani, E., & Mansur, I. (1998). Sensitivity of the Bank Stock Returns Distribution to Changes in the Level and Volatility of Interest Rates: A GARCH-M Model. Journal of Banking and Finance, 22, 535-563.

Engle, R.F. (1982). Autoregressive conditional heteroskedasticity with estimates of the variance of U.K. inflation. Econometrica, 50, 987-1008.

Fama, E.F. (1981), Stock returns, real activity, inflation and money. American Economic Review, 71, 545-65.

Ferrer, R., Gonza’lez, C., & Soto, G. M. (2010). Linear and nonlinear interest rate exposure in Spain. Managerial Finance, 36(5), 431-451.

Corsetti, G., Meier, A., & Müller, G. (2009). Fiscal Stimulus with Spending Reversals. International Monetary Fund. Working Paper 106.

Hussainey, K., & Ngoc, L. K. (2009). The impact of macroeconomic indicators on Vietnamese stock prices. The Journal of Risk Finance, 10(4), 321-332.

Hyde, S. (2007). The response of industry stock returns to market, exchange rate and interest rate risks. Managerial Finance, 33(9), 693-709.

Joseph, N. L., & Vezos, P. (2006). The sensitivity of US banks’ stock returns to interest rate and exchange rate changes. Managerial Finance, 33(2), 182-199.

Mohammad, S.D., Hussain, A., & Ali, A. (2009). Impact of macroeconomics variables on stockprices: empirical evidence in case of KSE (Karachi Stock Exchange). European Journal of Scientific Research, 38(1), 96-103.

Liow, K. H., Ibrahim, M. H., & Huang Q. (2006). Macroeconomic risk influences on the property stock market. Journal of Property Investment & Finance, 24(4), 295-323.

Liu, M. H., & Shrestha, K. M. (2008). Analysis of the long-term relationship between macroeconomic variables and the Chinese stock market using heteroscedastic cointegration. Managerial Finance, 34(11), 744-755.

O'Sullivan, A., & Sheffrin, M.S. (2003). Economics: Principles in action. New Jersey: Pearson Prentice Hall.

Pal, K., & Mittal, R. (2011). Impact of macroeconomic indicators on Indian capital markets. The Journal of Risk Finance, 12(2), 84-97.

Tai, C.S. (2010). Foreign exchange risk and risk exposure in the Japanese stock market. Managerial Finance, 36(6), 511-524.

Wetmore, J., & Brick, J. (1994). Commercial bank risk: market, interest rate, and foreign exchange. The Journal of Financial Research, 17, 585-96.

Wickremasinghe, G. (2011). The Sri Lankan stock market and the macro economy: an empirical investigation. Studies in Economics and Finance, 28(3), 179-195.