Volatility and Long-Term Relations in Equity Markets: Empirical Evidence from Germany, Switzerland, and the UK
AbstractThis paper has two main objectives. First, it compares several Generalized Autoregressive Conditional Heteroskedasticity (GARCH) family models in order to model and forecast the conditional variance of German, Swiss and UK stock market indexes. Results obtained reveal that all GARCH family models show evidence of asymmetric effects. Based on the ‘out-of-sample’ forecasts, the paper finds the model that gives better volatility forecasts for each market index considered in this study. Second, it investigates a long-run relation between these markets using the cointegration methodology. Cointegration test results show that DAX 30, FTSE 100 and SMI indexes move together in the long run. The Vector Error Correction Model (VECM) indicates a positive long-run relation among these indexes, while the error correction terms indicate that the Swiss market is the initial receptor of external shocks. One of the main findings of this study is that although the UK, Switzerland and Germany do not share a common currency, diversification benefits of investing in these countries could be very low given that their stock markets seem to move together in the long run.
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Bibliographic InfoArticle provided by IUP Publications in its journal The IUP Journal of Financial Economics.
Volume (Year): VII (2009)
Issue (Month): 2 (June)
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Other versions of this item:
- Guidi, Francesco, 2008. "Volatility and Long Term Relations in Equity Markets: Empirical Evidence from Germany, Switzerland, and the UK," MPRA Paper 11535, University Library of Munich, Germany.
- C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods
- G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
- C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models
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