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Do ‘Fat Tails’ Matter in GARCH Estimation? Stock Market Efficiency in Romania and the Czech Republic

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  • Barry Harrison
  • David Paton

Abstract

The use of the GARCH-class of models is commonplace when examining stock market returns. In this paper we use data on stock markets in two transition economies to demonstrate the importance of using the correct GARCH specification. When returns are characterised by ‘fat tails’ or kurtosis the use of a GARCH-t specification is appropriate. Returns in Romania are symmetric, but characterised by kurtosis. Returns in the Czech Republic are normally distributed. Using a standard GARCH specification leads to rejection of the null hypothesis of market efficiency in Romania, whereas this null hypothesis cannot be rejected using the GARCH-t specification. The null hypothesis of efficiency cannot be rejected in the Czech Republic using either specification. Thus, we find that the presence of ‘fat tails’ can have important implications for inference in the analysis of stock market returns.

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File URL: http://www.ntu.ac.uk/research/document_uploads/31288.pdf
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Bibliographic Info

Paper provided by Nottingham Trent University, Nottingham Business School, Economics Division in its series Working Papers with number 2004/3.

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Date of creation: Aug 2004
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Handle: RePEc:nbs:wpaper:2004/3

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Related research

Keywords: GARCH; transition; stock market efficiency;

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