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ARCH in the G7 Equity Markets: A Speculative Explanation

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  • Lee Redding

Abstract

This paper explores whether speculative activity can,in practice,generate the ARCH- type behavior found in .nancial time series.Specifically,G7 equity marke indices are examined for evidence of a dynamic whereby speculative interest is self-sustaining, that is,markets can become 'hot'. A straightforward model,taken from Faruqee and Redding [9 ],generates some testable implications of the idea.Tests of the model on the data show that not only does he model offer an explanation for volatility clustering,but also can be considered a statistical improvement on standard GARCH representations.

Suggested Citation

  • Lee Redding, 2001. "ARCH in the G7 Equity Markets: A Speculative Explanation," Working Papers 2001_3, Business School - Economics, University of Glasgow.
    • Handle: RePEc:gla:glaewp:2001_3
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    1. Caplin, Andrew & Leahy, John, 1994. "Business as Usual, Market Crashes, and Wisdom after the Fact," American Economic Review, American Economic Association, vol. 84(3), pages 548-565, June.
    2. Marianne Baxter & Robert G. King, 1999. "Measuring Business Cycles: Approximate Band-Pass Filters For Economic Time Series," The Review of Economics and Statistics, MIT Press, vol. 81(4), pages 575-593, November.
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