Volatility Forecasting Models and Market Co-Integration: A Study on South-East Asian Markets
AbstractVolatility forecasting is an imperative research field in financial markets and crucial component in most financial decisions. Nevertheless, which model should be used to assess volatility remains a complex issue as different volatility models result in different volatility approximations. The concern becomes more complicated when one tries to use the forecasting for asset distribution and risk management purposes in the linked regional markets. This paper aims at observing the effectiveness of the contending models of statistical and econometric volatility forecasting in the three South-east Asian prominent capital markets, i.e. STI, KLSE, and JKSE. In this paper, we evaluate eleven different models based on two classes of evaluation measures, i.e. symmetric and asymmetric error statistics, following Kumar’s (2006) framework. We employ 10-year data as in sample and 6-month data as out of sample to construct and test the models, consecutively. The resulting superior methods, which are selected based on the out of sample forecasts and some evaluation measures in the respective markets, are then used to assess the markets cointegration. We find that the best volatility forecasting models for JKSE, KLSE, and STI are GARCH (2,1), GARCH(3,1), and GARCH (1,1), respectively. We also find that international portfolio investors cannot benefit from diversification among these three equity markets as they are cointegrated.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by Department of Management and Business, Padjadjaran University in its series Working Papers in Business, Management and Finance with number 201005.
Length: 16 pages
Date of creation: May 2010
Date of revision: May 2010
Volatility Forecasting; Capital Market; Risk Management;
Find related papers by JEL classification:
- G0 - Financial Economics - - General
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Carol Alexander & Anca Dimitriu, 2003. "Equity Indexing: Conitegration and Stock Price Dispersion: A Regime Switiching Approach to market Efficiency," ICMA Centre Discussion Papers in Finance icma-dp2003-02, Henley Business School, Reading University.
- Andrew W. Lo & A. Craig MacKinlay, 1991.
"An Econometric Analysis of Nonsynchronous Trading,"
NBER Working Papers
2960, National Bureau of Economic Research, Inc.
- Andrew W. Lo & Craig A. MacKinlay, . "An Econometric Analysis of Nonsyschronous-Trading," Rodney L. White Center for Financial Research Working Papers 19-89, Wharton School Rodney L. White Center for Financial Research.
- Bollerslev, Tim, 1986.
"Generalized autoregressive conditional heteroskedasticity,"
Journal of Econometrics,
Elsevier, vol. 31(3), pages 307-327, April.
- Tim Bollerslev, 1986. "Generalized autoregressive conditional heteroskedasticity," EERI Research Paper Series EERI RP 1986/01, Economics and Econometrics Research Institute (EERI), Brussels.
- Anderson, Torben G. & Bollerslev, Tim & Diebold, Francis X. & Labys, Paul, 2002.
"Modeling and Forecasting Realized Volatility,"
02-12, Duke University, Department of Economics.
- Torben G. Andersen & Tim Bollerslev & Francis X. Diebold & Paul Labys, 2001. "Modeling and Forecasting Realized Volatility," Center for Financial Institutions Working Papers 01-01, Wharton School Center for Financial Institutions, University of Pennsylvania.
- Torben G. Andersen & Tim Bollerslev & Francis X. Diebold & Paul Labys, 2001. "Modeling and Forecasting Realized Volatility," NBER Working Papers 8160, National Bureau of Economic Research, Inc.
- French, Kenneth R. & Schwert, G. William & Stambaugh, Robert F., 1987. "Expected stock returns and volatility," Journal of Financial Economics, Elsevier, vol. 19(1), pages 3-29, September.
- Lucas, Andr‚, 1997. "Strategic and tactical asset allocation and the effect of long-run equilibrium relations," Serie Research Memoranda 0042, VU University Amsterdam, Faculty of Economics, Business Administration and Econometrics.
- MacKinnon, James G, 1996.
"Numerical Distribution Functions for Unit Root and Cointegration Tests,"
Journal of Applied Econometrics,
John Wiley & Sons, Ltd., vol. 11(6), pages 601-18, Nov.-Dec..
- James G. MacKinnon, 1995. "Numerical Distribution Functions for Unit Root and Cointegration Tests," Working Papers 918, Queen's University, Department of Economics.
- Knif, Johan & Pynnonen, Seppo, 1999. "Local and global price memory of international stock markets," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 9(2), pages 129-147, April.
- Johansen, Soren & Juselius, Katarina, 1990. "Maximum Likelihood Estimation and Inference on Cointegration--With Applications to the Demand for Money," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 52(2), pages 169-210, May.
- MacKinnon, James G & Haug, Alfred A & Michelis, Leo, 1999.
"Numerical Distribution Functions of Likelihood Ratio Tests for Cointegration,"
Journal of Applied Econometrics,
John Wiley & Sons, Ltd., vol. 14(5), pages 563-77, Sept.-Oct.
- James G. MacKinnon & Alfred A. Haug & Leo Michelis, 1996. "Numerical Distribution Functions of Likelihood Ratio Tests for Cointegration," Working Papers 1996_07, York University, Department of Economics.
- Mackinnon, J.G. & Haug, A.A. & Michelis, L., 1996. "Numerical Distribution Functions of Likelihood Ratio Tests for Cointegration," G.R.E.Q.A.M. 96a09, Universite Aix-Marseille III.
- Søren Tolver Jensen & Anders Rahbek, 2004. "Asymptotic Normality of the QMLE Estimator of ARCH in the Nonstationary Case," Econometrica, Econometric Society, vol. 72(2), pages 641-646, 03.
- Robert-Jan Gerrits & Ayse Yuce, 1999. "Short- and long-term links among European and US stock markets," Applied Financial Economics, Taylor & Francis Journals, vol. 9(1), pages 1-9.
- Benoit Mandelbrot, 1963. "The Variation of Certain Speculative Prices," The Journal of Business, University of Chicago Press, vol. 36, pages 394.
- Kenneth R. French & James M. Poterba, 1991.
"Investor Diversification and International Equity Markets,"
NBER Working Papers
3609, National Bureau of Economic Research, Inc.
- French, Kenneth R & Poterba, James M, 1991. "Investor Diversification and International Equity Markets," American Economic Review, American Economic Association, vol. 81(2), pages 222-26, May.
- Granger, Clive W J & Hallman, Jeffrey J, 1991. "Long Memory Series with Attractors," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 53(1), pages 11-26, February.
- Nelson, Daniel B, 1991. "Conditional Heteroskedasticity in Asset Returns: A New Approach," Econometrica, Econometric Society, vol. 59(2), pages 347-70, March.
- Dwyer, Gerald Jr. & Wallace, Myles S., 1992. "Cointegration and market efficiency," Journal of International Money and Finance, Elsevier, vol. 11(4), pages 318-327, August.
- Aggarwal, Reena & Inclan, Carla & Leal, Ricardo, 1999. "Volatility in Emerging Stock Markets," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 34(01), pages 33-55, March.
- Granger, C. W. J., 1981. "Some properties of time series data and their use in econometric model specification," Journal of Econometrics, Elsevier, vol. 16(1), pages 121-130, May.
- Sinha, Pankaj & Sinha, Gyanesh, 2010.
"Volatility Spillover in India, USA and Japan Investigation of Recession Effects,"
21873, University Library of Munich, Germany.
- Sinha, Pankaj & Sinha, Gyanesh, 2010. "Volatility Spillover in India, USA and Japan Investigation of Recession Effects," MPRA Paper 47190, University Library of Munich, Germany, revised 17 May 2013.
- Mulyadi, Martin Surya, 2009. "Volatility spillover in Indonesia, USA, and Japan capital market," MPRA Paper 16914, University Library of Munich, Germany.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Aldrin Herwany).
If references are entirely missing, you can add them using this form.