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GARCH Model with Cross-sectional Volatility; GARCHX Models

  • Steve Satchell
  • Soosung Hwang

This study introduces GARCH models with cross-sectional market volatility, which are called GARCHX models. The cross-sectional market volatility is a special case of common heteroscedasticity in asset specific returns, which is suggested by Connor and Linton (2001) as an important component in individual asset volatility. Using UK and US data, we find that daily return volatility can be better specified with GARCHX models, but GARCHX models do not necessarily perform better than conventional GARCH models in forecasting.

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File URL: http://www2.warwick.ac.uk/fac/soc/wbs/research/wfri/rsrchcentres/ferc/wrkingpaprseries/fwp01-16.pdf
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Paper provided by Warwick Business School, Finance Group in its series Working Papers with number wp01-16.

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Date of creation: 2001
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Handle: RePEc:wbs:wpaper:wp01-16
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  1. Fama, Eugene F. & French, Kenneth R., 1993. "Common risk factors in the returns on stocks and bonds," Journal of Financial Economics, Elsevier, vol. 33(1), pages 3-56, February.
  2. Andersen, Torben G & Bollerslev, Tim, 1998. "Answering the Skeptics: Yes, Standard Volatility Models Do Provide Accurate Forecasts," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 39(4), pages 885-905, November.
  3. Braun, Phillip A & Nelson, Daniel B & Sunier, Alain M, 1995. " Good News, Bad News, Volatility, and Betas," Journal of Finance, American Finance Association, vol. 50(5), pages 1575-1603, December.
  4. 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.
  5. Chen, Nai-Fu & Roll, Richard & Ross, Stephen A, 1986. "Economic Forces and the Stock Market," The Journal of Business, University of Chicago Press, vol. 59(3), pages 383-403, July.
  6. Anthony Hall & Soosung Hwang & Stephen E. Satchell, 2000. "Using Bayesian Variable Selection Methods to Choose Style Factors in Global Stock Return Models," Econometric Society World Congress 2000 Contributed Papers 1213, Econometric Society.
  7. Hull, John C & White, Alan D, 1987. " The Pricing of Options on Assets with Stochastic Volatilities," Journal of Finance, American Finance Association, vol. 42(2), pages 281-300, June.
  8. Torben G. Andersen & Tim Bollerslev & Francis X. Diebold & Paul Labys, 1999. "The Distribution of Exchange Rate Volatility," Center for Financial Institutions Working Papers 99-08, Wharton School Center for Financial Institutions, University of Pennsylvania.
  9. Constantinides, George M & Duffie, Darrell, 1996. "Asset Pricing with Heterogeneous Consumers," Journal of Political Economy, University of Chicago Press, vol. 104(2), pages 219-40, April.
  10. Soosung Hwang & Pedro L. Valls Pereira, 2006. "Small sample properties of GARCH estimates and persistence," The European Journal of Finance, Taylor & Francis Journals, vol. 12(6-7), pages 473-494.
  11. Harvey, Campbell R. & Siddique, Akhtar, 1999. "Autoregressive Conditional Skewness," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 34(04), pages 465-487, December.
  12. Stephen Satchell & Soosung Hwang, 1999. "Market Risk and the Concept of Fundamental Volatility: Measuring Volatility Across Asset and Derivative Markets and Testing for the Impact of Derivatives Markets on Financial Markets," Working Papers wp99-16, Warwick Business School, Finance Group.
  13. Hwang, Soosung & Salmon, Mark, 2004. "Market stress and herding," Journal of Empirical Finance, Elsevier, vol. 11(4), pages 585-616, September.
  14. Bulkley, George & Tonks, Ian, 1991. "Cross-sectional Volatility on the U.K. Stock Market," The Manchester School of Economic & Social Studies, University of Manchester, vol. 59(0), pages 72-80, Supplemen.
  15. John Y. Campbell, 2001. "Have Individual Stocks Become More Volatile? An Empirical Exploration of Idiosyncratic Risk," Journal of Finance, American Finance Association, vol. 56(1), pages 1-43, 02.
  16. Engle, Robert F. & Ng, Victor K. & Rothschild, Michael, 1990. "Asset pricing with a factor-arch covariance structure : Empirical estimates for treasury bills," Journal of Econometrics, Elsevier, vol. 45(1-2), pages 213-237.
  17. Soosung Hwang, 2000. "Properties of Cross-sectional Volatility," Working Papers wp00-05, Warwick Business School, Finance Group.
  18. Harvey, Andrew C & Shephard, Neil, 1996. "Estimation of an Asymmetric Stochastic Volatility Model for Asset Returns," Journal of Business & Economic Statistics, American Statistical Association, vol. 14(4), pages 429-34, October.
  19. Ferson, Wayne E & Harvey, Campbell R, 1991. "The Variation of Economic Risk Premiums," Journal of Political Economy, University of Chicago Press, vol. 99(2), pages 385-415, April.
  20. MacDonald, John A & Shawky, Hany A, 1995. "On Estimating Stock Market Volatility: An Exploratory Approach," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 18(4), pages 449-63, Winter.
  21. Nelson, Daniel B & Cao, Charles Q, 1992. "Inequality Constraints in the Univariate GARCH Model," Journal of Business & Economic Statistics, American Statistical Association, vol. 10(2), pages 229-35, April.
  22. Connor, Gregory & Korajczyk, Robert A. & Linton, Oliver, 2006. "The common and specific components of dynamic volatility," Journal of Econometrics, Elsevier, vol. 132(1), pages 231-255, May.
  23. Soosung Hwang & John Knight & Stephen E. Satchell, 2001. "Forecasting Nonlinear Functions of Returns Using LINEX Loss Functions," Annals of Economics and Finance, Society for AEF, vol. 2(1), pages 187-213, May.
  24. Anthony D. Hall & S. Hwang & Steve Satchell, 2000. "Using Bayesian Variable Selection Methods to Choose Style Factors in Global Stock Return," Research Paper Series 31, Quantitative Finance Research Centre, University of Technology, Sydney.
  25. 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.
  26. Hwang, S. & Satchell, S. E., 1998. "Implied Volatility Forecasting: A Comparison of Different Procedures," Accounting and Finance Discussion Papers 98-af38, Faculty of Economics, University of Cambridge.
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