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A Comparative GARCH Analysis of Macroeconomic Variables and Returns on Modelling the Kurtosis of FTSE 100 Implied Volatility Index

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  • Abdulilah Ibrahim Alsheikhmubarak

    (Royal Holloway, University of London, UK)

  • Evangelos Giouvris

    (Royal Holloway, University of London, UK)

Abstract

Modelling the volatility (or kurtosis) of the implied volatility is an important aspect of financial markets when analysing market consensus and risk strategies. The purpose of this study is to evaluate the ability of symmetric and asymmetric GARCH systems to model the volatility of the FTSE 100 Implied Volatility Index (IV). We use GARCH, EGARCH, GJR-GARCH and GARCH-MIDAS to model variance. We also introduce FTSE 100 returns and several macroeconomic variables (UK industrial production, 3M LIBOR, GBP effective exchange rate and unemployment rate) to investigate whether they explain variance. Our results show that market returns is a major explanatory factor besides macroeconomic variables. Also, GARCH (1,1) outperforms other asymmetric models unless there is exceptionally high volatility such as the crisis of 2008 in which case EGARCH performs better. GJR-GARCH is outperformed by all other models. GARCH-MIDAS shows that both macroeconomic variables and market returns are useful when estimating IV.

Suggested Citation

  • Abdulilah Ibrahim Alsheikhmubarak & Evangelos Giouvris, 2018. "A Comparative GARCH Analysis of Macroeconomic Variables and Returns on Modelling the Kurtosis of FTSE 100 Implied Volatility Index," Multinational Finance Journal, Multinational Finance Journal, vol. 22(3-4), pages 119-172, September.
    • Handle: RePEc:mfj:journl:v:22:y:2018:i:3-4:p:119-172
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    References listed on IDEAS

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    More about this item

    Keywords

    FTSE 100 implied volatility index (IV); GARCH; EGARCH; GJR-GARCH; GARCH-MIDAS; FTSE 100 index returns; macroeconomic variables;
    All these keywords.

    JEL classification:

    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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