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Volatility Forecasting Models and Market Co-Integration: A Study on South-East Asian Markets

  • Erie Febrian

    ()

    (Finance & Risk Management Study Group (FRMSG) FE UNPAD)

  • Aldrin Herwany

    ()

    (Research Division, Laboratory of Management FE UNPAD)

Registered author(s):

    Volatility 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.

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    File URL: http://lp3e.fe.unpad.ac.id/wpaman/201005.pdf
    File Function: First version, 2010
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    Paper provided by Department of Management and Business, Padjadjaran University in its series Working Papers in Business, Management and Finance with number 201005.

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    Length: 16 pages
    Date of creation: May 2010
    Date of revision: May 2010
    Handle: RePEc:unp:wpaman:201005
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