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Forecasting the Volatilities and Covariances of ISE Government Debt Securities Indices

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  • M.Mete Doganay
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    Abstract

    Financial institutions should forecast the volatilities and correlations (thus covariances) of the financial instruments in their portfolios in order to calculate their market risk exposure correctly. This study examines the price volatility and covariance of interest related securities. In this study, the volatilities and covariances of ISE GDS price indices returns, which are taken as proxy for returns of debt-related securities, are modeled by using Generalized Autoregressive Conditional Heteroskedasticity (GARCH) and Exponentially Weighted Moving Average (EWMA) methods. The models having been estimated, out-of-sample forecasting performance of the models for the next day’s variance and covariance are analyzed. The analyses show that in general GARCH models are more efficient to forecast both next day’s variance and covariance. This result is in line with other studies in the literature which used different financial instruments.

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    File URL: http://www.borsaistanbul.com/datum/imkbdergi/EN/ISE_Review_27.pdf
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    Bibliographic Info

    Article provided by Research and Business Development Department, Borsa Istanbul in its journal Istanbul Stock Exchange Review.

    Volume (Year): 7 (2003)
    Issue (Month): 27 ()
    Pages: 15-34

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    Handle: RePEc:bor:iserev:v:7:y:2003:i:27:p:15-34

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    1. Greenwood, Jeremy & Jovanovic, Boyan, 1990. "Financial Development, Growth, and the Distribution of Income," Journal of Political Economy, University of Chicago Press, vol. 98(5), pages 1076-1107, October.
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    7. Islam, Nazrul, 1995. "Growth Empirics: A Panel Data Approach," The Quarterly Journal of Economics, MIT Press, vol. 110(4), pages 1127-70, November.
    8. King, Robert G. & Levine, Ross, 1993. "Finance and growth : Schumpeter might be right," Policy Research Working Paper Series 1083, The World Bank.
    9. Aryeetey, Ernest, et al, 1997. "Financial Market Fragmentation and Reforms in Ghana, Malawi, Nigeria, and Tanzania," World Bank Economic Review, World Bank Group, vol. 11(2), pages 195-218, May.
    10. Malcolm Knight & Norman Loayza & Delano Villanueva, 1993. "Testing the Neoclassical Theory of Economic Growth: A Panel Data Approach," IMF Staff Papers, Palgrave Macmillan, vol. 40(3), pages 512-541, September.
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