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An Application of GARCH while investigating volatility in stock returns of the World

  • Subhani, Muhammad Imtiaz
  • Hasan, Syed Akif
  • Osman, Ms. Amber

A healthy stock market is a sign of sound and healthy economy. Stock market is a volatile market affected, at times directly and most often indirectly, by many micro and macroeconomic players. Of these players interest rates and exchange rates are among the ones undertaken in this study. The rationale behind this study is to ascertain the volatility in stock returns of various stock exchanges in relevance to interest rates and exchange rates over a range of 8 countries for assorted periods. GARCH (1, 1) was deployed for investigating the possible eventualities of volatilities of stock markets. The findings were found varying for Pakistan, India, Hong Kong, Japan, United States, United Kingdom, Spain and Germany. Moreover, almost for all countries GARCH (1, 1) yielded significant results confirming the existence of volatility of stock markets for the current period of outlined countries due to volatility of those stock markets during the previous lags. The findings may help investors know the stock markets’ trends which are also for some cases (nations) affected by interest rates and/or exchange rates and thus to invest accordingly.

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File URL: http://mpra.ub.uni-muenchen.de/45089/1/MPRA_paper_45089.pdf
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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 45089.

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Date of creation: 2012
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Publication status: Published in South Asian Journal of Management Sciences 2.5(2012): pp. 49-59
Handle: RePEc:pra:mprapa:45089
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  1. Fama, Eugene F, 1981. "Stock Returns, Real Activity, Inflation, and Money," American Economic Review, American Economic Association, vol. 71(4), pages 545-65, September.
  2. Stuart Hyde, 2007. "The response of industry stock returns to market, exchange rate and interest rate risks," Managerial Finance, Emerald Group Publishing, vol. 33(9), pages 693-709.
  3. Tim Bollerslev, 1986. "Generalized autoregressive conditional heteroskedasticity," EERI Research Paper Series EERI RP 1986/01, Economics and Econometrics Research Institute (EERI), Brussels.
  4. Engle, Robert F, 1982. "Autoregressive Conditional Heteroscedasticity with Estimates of the Variance of United Kingdom Inflation," Econometrica, Econometric Society, vol. 50(4), pages 987-1007, July.
  5. Román Ferrer & Cristóbal González & Gloria M. Soto, 2010. "Linear and nonlinear interest rate exposure in Spain," Managerial Finance, Emerald Group Publishing, vol. 36(5), pages 431-451, May.
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  7. Chu-Sheng Tai, 2010. "Foreign exchange risk and risk exposure in the Japanese stock market," Managerial Finance, Emerald Group Publishing, vol. 36(6), pages 511-524, June.
  8. Baillie, R.T. & Degennaro, R.P., 1988. "Stock Returns And Volatility," Papers 8803, Michigan State - Econometrics and Economic Theory.
  9. Choi, Jongmoo Jay & Elyasiani, Elyas & Kopecky, Kenneth J., 1992. "The sensitivity of bank stock returns to market, interest and exchange rate risks," Journal of Banking & Finance, Elsevier, vol. 16(5), pages 983-1004, September.
  10. Karam Pal & Ruhee Mittal, 2011. "Impact of macroeconomic indicators on Indian capital markets," Journal of Risk Finance, Emerald Group Publishing, vol. 12(2), pages 84-97, February.
  11. Khaled Hussainey & Le Khanh Ngoc, 2009. "The impact of macroeconomic indicators on Vietnamese stock prices," Journal of Risk Finance, Emerald Group Publishing, vol. 10(4), pages 321-332, August.
  12. Wetmore, Jill L & Brick, John R, 1994. "Commercial Bank Risk: Market, Interest Rate, and Foreign Exchange," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 17(4), pages 585-96, Winter.
  13. Elyasiani, Elyas & Mansur, Iqbal, 1998. "Sensitivity of the bank stock returns distribution to changes in the level and volatility of interest rate: A GARCH-M model," Journal of Banking & Finance, Elsevier, vol. 22(5), pages 535-563, May.
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