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GARCH Modeling of Robust Market Returns

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Author Info
Lucía Cuadro Sáez
Manuel Moreno

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Abstract

Daily financial market returns (as log difference in closing prices) may be quite sensitive to operations with low trading volumes and big changes in prices frequently traded at market closing times. This paper proposes a more robust estimation of market, returns by providing a new indicator that accounts for the information content in prices and trading volumes: the volume weighted return. Then we estimate a GARCH (1,1) model for the IBEX-35 futures market that includes shocks arising from countries linked to the Spanish economy. Our empirical findings suggest that the new measure of market evolution provide more moderate estimates of the impact of the relevant news coming from abroad and thus, it might be relevant to assess the linkages of one market to other economies.

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Publisher Info
Paper provided by Kiel Institute for the World Economy in its series Kiel Advanced Studies Working Papers with number 440.

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Length: 26 pages
Date of creation: May 2007
Date of revision:
Handle: RePEc:kie:kieasw:440

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Related research
Keywords: volume weighted return; trading volumes; international transmission of news; GARCH;

Find related papers by JEL classification:
G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies
G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)

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References listed on IDEAS
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  1. Lamoureux, Christopher G & Lastrapes, William D, 1994. "Endogenous Trading Volume and Momentum in Stock-Return Volatility," Journal of Business & Economic Statistics, American Statistical Association, vol. 12(2), pages 253-60, April.
  2. Rockinger, Michael & Urga, Giovanni, 2001. "A Time-Varying Parameter Model to Test for Predictability and Integration in the Stock Markets of Transition Economies," Journal of Business & Economic Statistics, American Statistical Association, vol. 19(1), pages 73-84, January.
  3. Hayo, Bernd & Kutan, Ali M., 2005. "IMF-related news and emerging financial markets," Journal of International Money and Finance, Elsevier, vol. 24(7), pages 1126-1142, November. [Downloadable!] (restricted)
  4. Geert Bekaert & Campbell R. Harvey, 1994. "Time-Varying World Market Integration," NBER Working Papers 4843, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  5. Giampiero M. Gallo, Barbara Pacini, 2000. "The effects of trading activity on market volatility," European Journal of Finance, Taylor and Francis Journals, vol. 6(2), pages 163-175, June. [Downloadable!] (restricted)
  6. Glosten, Lawrence R & Jagannathan, Ravi & Runkle, David E, 1993. " On the Relation between the Expected Value and the Volatility of the Nominal Excess Return on Stocks," Journal of Finance, American Finance Association, vol. 48(5), pages 1779-1801, December. [Downloadable!] (restricted)
    Other versions:
  7. Geert Bekaert & Campbell R. Harvey, 2000. "Foreign Speculators and Emerging Equity Markets," Journal of Finance, American Finance Association, vol. 55(2), pages 565-613, 04. [Downloadable!] (restricted)
    Other versions:
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This page was last updated on 2009-11-13.

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