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Asymmetries in Volatility: An Empirical Study for the Peruvian Stock and Forex Markets

Author

Listed:
  • Willy Alanya

    (Banco Central de Reserva del Perú, 441-455 Santa, Rosa Street, Lima 1, Peru)

  • Gabriel Rodríguez

    (Departamento de Economía, Pontificia Universidad Católica del Perú, 1801 Universitaria Avenue, San Miguel, Lima 32, Peru)

Abstract

Asymmetric autoregressive conditional heteroskedasticity (EGARCH) models and asymmetric stochastic volatility (ASV) models are applied to daily data of Peruvian stock and Forex markets for the period of 5 January 1998–30 December 2011. Following the approach developed in [Omori, Y, S Chib, N Shephard and J Nakajima (2007). Stochastic volatility with leverage: Fast likelihood inference. Journal of Econometrics, 140, 425–449], Bayesian estimation tools are used with Normal and t-Student errors in both models. The results suggest the significant presence of asymmetric effects in both markets. In the stock market, negative shocks generate higher volatility than positive shocks. In the Forex market, shocks related to episodes of depreciation create higher uncertainty in comparison with episodes of appreciation. Thus, the Central Reserve Bank faces relatively major difficulties in its intention of smoothing Forex volatility in times of depreciation. The model with the best fit in both markets is the ASV model with Normal errors. The stock market returns have greater periods of volatility; however, both markets react to shocks in the economy, as they display similar patterns and have a significant correlation for the sample period studied.

Suggested Citation

  • Willy Alanya & Gabriel Rodríguez, 2019. "Asymmetries in Volatility: An Empirical Study for the Peruvian Stock and Forex Markets," Review of Pacific Basin Financial Markets and Policies (RPBFMP), World Scientific Publishing Co. Pte. Ltd., vol. 22(01), pages 1-18, March.
    • Handle: RePEc:wsi:rpbfmp:v:22:y:2019:i:01:n:s0219091519500036
    DOI: 10.1142/S0219091519500036
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    More about this item

    Keywords

    Asymmetries; EGARCH; stochastic volatility; stock returns; Forex returns; Bayesian estimation; Normal errors; t-Student’s errors;
    All these keywords.

    JEL classification:

    • C11 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Bayesian Analysis: General
    • C12 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Hypothesis Testing: General
    • C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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