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Asymmetry in Volatility: A Comparison of Developed and Transition Stock Markets

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  • Piotr Wdowinski
  • Marta Malecka

Abstract

ARCH modelling framework of Engle (1982) and its GARCH generalization of Bollerslev (1986) gave a huge impetus to econometric model building in the field of financial time series with time-varying variance. The main idea of the models was to describe the most typical features of capital markets like volatility clustering, excess kurtosis and fat tails. As empirical evidence shows asymmetry is also a prominent feature of stock market returns volatility. The reaction of risk if stock returns go off the long run trajectory is different in case of positive and negative market news. Thus it is indispensable to employ asymmetric models being a modification of a traditional GARCH. In the paper we used an approach of Engle and Ng (1993) to test for asymmetric effects in stock indices of developed and Central European stock markets.

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File URL: http://www.cesifo-group.de/portal/page/portal/DocBase_Content/WP/WP-CESifo_Working_Papers/wp-cesifo-2010/wp-cesifo-2010-03/cesifo1_wp2974.pdf
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Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 2974.

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Date of creation: 2010
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Handle: RePEc:ces:ceswps:_2974

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Keywords: asymmetry; volatility; stock market; transition;

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References

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  1. Lawrence R. Glosten & Ravi Jagannathan & David E. Runkle, 1993. "On the relation between the expected value and the volatility of the nominal excess return on stocks," Staff Report, Federal Reserve Bank of Minneapolis 157, Federal Reserve Bank of Minneapolis.
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  3. Schwert, G.W. & Seguin, P.J., 1988. "Heteroskedasticity In Stock Returns," Papers, Rochester, Business - General bc_88-02, Rochester, Business - General.
  4. Engle, Robert F, 1982. "Autoregressive Conditional Heteroscedasticity with Estimates of the Variance of United Kingdom Inflation," Econometrica, Econometric Society, Econometric Society, vol. 50(4), pages 987-1007, July.
  5. Gregory Koutmos & Andreas Pericli & Lenos Trigeorgis, 2006. "Short-term Dynamics in the Cyprus Stock Exchange," The European Journal of Finance, Taylor & Francis Journals, Taylor & Francis Journals, vol. 12(3), pages 205-216.
  6. Chen, Cathy W.S. & Yang, Ming Jing & Gerlach, Richard & Jim Lo, H., 2006. "The asymmetric reactions of mean and volatility of stock returns to domestic and international information based on a four-regime double-threshold GARCH model," Physica A: Statistical Mechanics and its Applications, Elsevier, Elsevier, vol. 366(C), pages 401-418.
  7. Ng, Victor & Engle, Robert F. & Rothschild, Michael, 1992. "A multi-dynamic-factor model for stock returns," Journal of Econometrics, Elsevier, Elsevier, vol. 52(1-2), pages 245-266.
  8. Christie, Andrew A., 1982. "The stochastic behavior of common stock variances : Value, leverage and interest rate effects," Journal of Financial Economics, Elsevier, Elsevier, vol. 10(4), pages 407-432, December.
  9. Schwert, G William, 1990. "Stock Volatility and the Crash of '87," Review of Financial Studies, Society for Financial Studies, Society for Financial Studies, vol. 3(1), pages 77-102.
  10. Tim Bollerslev, 1986. "Generalized autoregressive conditional heteroskedasticity," EERI Research Paper Series EERI RP 1986/01, Economics and Econometrics Research Institute (EERI), Brussels.
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  12. Priti Verma & Dave Jackson, 2008. "Interest rate and bank stock returns asymmetry: Evidence from U.S. banks," Journal of Economics and Finance, Springer, Springer, vol. 32(2), pages 105-118, April.
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  16. Robert F. Engle & Victor K. Ng, 1991. "Measuring and Testing the Impact of News on Volatility," NBER Working Papers 3681, National Bureau of Economic Research, Inc.
  17. Hull, John C & White, Alan D, 1987. " The Pricing of Options on Assets with Stochastic Volatilities," Journal of Finance, American Finance Association, American Finance Association, vol. 42(2), pages 281-300, June.
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  19. Bollerslev, Tim & Chou, Ray Y. & Kroner, Kenneth F., 1992. "ARCH modeling in finance : A review of the theory and empirical evidence," Journal of Econometrics, Elsevier, Elsevier, vol. 52(1-2), pages 5-59.
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Cited by:
  1. Lai, Jing-yi, 2012. "Shock-dependent conditional skewness in international aggregate stock markets," The Quarterly Review of Economics and Finance, Elsevier, Elsevier, vol. 52(1), pages 72-83.

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