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Volatility and Long Term Relations in Equity Markets: Empirical Evidence from Germany, Switzerland, and the UK

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  • Guidi, Francesco

Abstract

The aim of this paper is twofold. First it aims to compare several GARCH family models in order to model and forecast the conditional variance of German, Swiss, and UK stock market indexes. The main result is that all GARCH family models show evidence of asymmetric effects. Based on the “out of sample” forecasts I can say that for each market considered there is a model that will lead to better volatility forecasts. Secondly a long run relation between these markets was investigated using the cointegration methodology. Cointegration tests show that DAX30, FTSE100, and SMI indexes move together in the long term. The VECM model 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 analysis is that although the UK, Switzerland and Germany do not share a common currency, the diversification benefits of investing in these countries could be very low given that their stock markets seem to move together in the lung term.

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Bibliographic Info

Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 11535.

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Date of creation: Nov 2008
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Handle: RePEc:pra:mprapa:11535

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Keywords: Stock Returns; Volatility; GARCH models; Cointegration;

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