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GARCH Modeling of Robust Market Returns

  • Lucía Cuadro Sáez
  • Manuel Moreno

Daily financial market returns (as log difference in closing prices) may be quite sensitive to operations with low trading volumes and big changes in prices frequently traded at market closing times. This paper proposes a more robust estimation of market, returns by providing a new indicator that accounts for the information content in prices and trading volumes: the volume weighted return. Then we estimate a GARCH (1,1) model for the IBEX-35 futures market that includes shocks arising from countries linked to the Spanish economy. Our empirical findings suggest that the new measure of market evolution provide more moderate estimates of the impact of the relevant news coming from abroad and thus, it might be relevant to assess the linkages of one market to other economies.

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File URL: https://www.ifw-kiel.de/ausbildung/asp/asp-wp/2007/aspwp440.pdf
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Paper provided by Kiel Institute for the World Economy in its series Kiel Advanced Studies Working Papers with number 440.

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Length: 26 pages
Date of creation: May 2007
Date of revision:
Handle: RePEc:kie:kieasw:440
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  1. Geert Bekaert & Campbell R. Harvey, 1997. "Foreign Speculators and Emerging Equity Markets," NBER Working Papers 6312, National Bureau of Economic Research, Inc.
  2. Bekaert, Geert & Harvey, Campbell R., 2003. "Emerging markets finance," Journal of Empirical Finance, Elsevier, vol. 10(1-2), pages 3-56, February.
  3. Hayo, Bernd & Kutan, Ali M., 2005. "IMF-related news and emerging financial markets," Journal of International Money and Finance, Elsevier, vol. 24(7), pages 1126-1142, November.
  4. Lamoureux, Christopher G & Lastrapes, William D, 1994. "Endogenous Trading Volume and Momentum in Stock-Return Volatility," Journal of Business & Economic Statistics, American Statistical Association, vol. 12(2), pages 253-60, April.
  5. Rockinger, Michael & Urga, Giovanni, 2001. "A Time-Varying Parameter Model to Test for Predictability and Integration in the Stock Markets of Transition Economies," Journal of Business & Economic Statistics, American Statistical Association, vol. 19(1), pages 73-84, January.
  6. Nikkinen, Jussi & Omran, Mohammed & Sahlstrom, Petri & Aijo, Janne, 2006. "Global stock market reactions to scheduled U.S. macroeconomic news announcements," Global Finance Journal, Elsevier, vol. 17(1), pages 92-104, September.
  7. Tkac, Paula A., 1999. "A Trading Volume Benchmark: Theory and Evidence," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 34(01), pages 89-114, March.
  8. Geert Bekaert & Campbell R. Harvey, 1994. "Time-Varying World Market Integration," NBER Working Papers 4843, National Bureau of Economic Research, Inc.
  9. Glosten, Lawrence R & Jagannathan, Ravi & Runkle, David E, 1993. " On the Relation between the Expected Value and the Volatility of the Nominal Excess Return on Stocks," Journal of Finance, American Finance Association, vol. 48(5), pages 1779-1801, December.
  10. Giampiero Gallo & Barbara Pacini, 2000. "The effects of trading activity on market volatility," The European Journal of Finance, Taylor & Francis Journals, vol. 6(2), pages 163-175.
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