Volatility Persistence and Inter-Linkages in Equity Markets
Namanda, Evelyne (2009)
Kuvaus
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Tiivistelmä
Stock market volatility is known to be very persistent, periods of high volatility as well as low volatility tend to last for several months but there is still room left for alternative explanations.
This study focuses on financial markets revisiting the issue of volatility persistence in stock market returns. It attempts to investigate empirically market returns, and volatility persistence in a distinct approach from previous researches and this by testing the memory process and inter-linkages in market volatility with the help of the generalized autoregressive conditional heteroskedastic models (GARCH and CGARCH) and Vector Autoregressive, VAR analysis.
The data used was gathered over a four year period 2005-2009 from Thomson Financial database. It consisted of close prices from major market indices: OMXH, S&P 500, FTSE 500 and TSE. Based on findings from previous studies, two hypotheses were formulated. The first hypothesis compares the accuracy of the complex CGARCH(1,1) to the simple GARCH(1,1) whereas the second hypothesis suggests that shocks in crisis periods are more persistent than in pre-crisis periods. Data for the second hypothesis was divided into two subsamples to cater for the different economic situations (pre-crisis and crisis periods).
Volatility persistence points to existence of short memory in equity markets, shocks to stock market volatility do not last for longer periods. The results also indicate that equity markets are strongly linked and this linkage is stronger in periods when markets are very volatile (crisis). In particular, the results show that U.S. and UK markets are dominant and leading sources of volatility expectations, as the volatility of S&P 500 is found to significantly affect the volatility expectations of UK, Finland and Japan markets.
The findings in this study play a major role in hedging strategies pursued by market participants, risk management and for the pricing of derivative assets.
This study focuses on financial markets revisiting the issue of volatility persistence in stock market returns. It attempts to investigate empirically market returns, and volatility persistence in a distinct approach from previous researches and this by testing the memory process and inter-linkages in market volatility with the help of the generalized autoregressive conditional heteroskedastic models (GARCH and CGARCH) and Vector Autoregressive, VAR analysis.
The data used was gathered over a four year period 2005-2009 from Thomson Financial database. It consisted of close prices from major market indices: OMXH, S&P 500, FTSE 500 and TSE. Based on findings from previous studies, two hypotheses were formulated. The first hypothesis compares the accuracy of the complex CGARCH(1,1) to the simple GARCH(1,1) whereas the second hypothesis suggests that shocks in crisis periods are more persistent than in pre-crisis periods. Data for the second hypothesis was divided into two subsamples to cater for the different economic situations (pre-crisis and crisis periods).
Volatility persistence points to existence of short memory in equity markets, shocks to stock market volatility do not last for longer periods. The results also indicate that equity markets are strongly linked and this linkage is stronger in periods when markets are very volatile (crisis). In particular, the results show that U.S. and UK markets are dominant and leading sources of volatility expectations, as the volatility of S&P 500 is found to significantly affect the volatility expectations of UK, Finland and Japan markets.
The findings in this study play a major role in hedging strategies pursued by market participants, risk management and for the pricing of derivative assets.