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Equity markets volatility dynamics in developed and newly emerging economies: EGARCH-with-skewed-t density approach

Author

Listed:
  • Bala A. Dahiru

    (Federal Inland Revenue Service, 20 Sokode Crescent, Zone 5, Abuja, FCT, Nigeria.)

  • Pam W. Jim

    (Federal Inland Revenue Service, 20 Sokode Crescent, Zone 5, Abuja, FCT, Nigeria.)

  • Kalu N. Nwonyuku

    (Federal Inland Revenue Service, 20 Sokode Crescent, Zone 5, Abuja, FCT, Nigeria.)

Abstract
We examine the volatility dynamics of four “newly†emerging and four developed stock markets using GARCH-type models and their variants and identify breaks in returns using the ICSS test proposed by Inclan and Tiao (1994). We compare MINT (Mexico, Indonesia, Nigeria and Turkey) emerging markets with those of four developed markets (France, Germany, Japan and USA) using weekly data from January 3, 1994 to March 31, 2014 and for Indonesia from July 1, 1997 to March 31, 2014. The estimates of GARCH, EGARCH (with and without breaks) and EGARCH-with-skewed-t density models are assessed to analyse the impact of variance shifts and distributional assumptions on equity market returns. Results reveal that the incorporation of variance shifts reduces the level of persistence in GARCH models. Stability and fluctuation tests suggest that returns and conditional volatilities in the stock markets have not been stable, especially during periods of financial crises. The paper concludes that EGARCH-with-skewed-t density specification exhibits improved model diagnostics compared to the standard (a)symmetric GARCH models (with Gaussian or Student's t densities) in the context of skewness, leverage and fat tails often present in financial returns.

Suggested Citation

  • Bala A. Dahiru & Pam W. Jim & Kalu N. Nwonyuku, 2017. "Equity markets volatility dynamics in developed and newly emerging economies: EGARCH-with-skewed-t density approach," Economics Bulletin, AccessEcon, vol. 37(4), pages 2394-2412.
    • Handle: RePEc:ebl:ecbull:eb-17-00029
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    References listed on IDEAS

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    More about this item

    Keywords

    Equity Market Volatility; ICSS; GARCH; Unit Roots; Variance Breaks; MINT; EGARCH-with-skewed-t model;
    All these keywords.

    JEL classification:

    • C2 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables
    • G1 - Financial Economics - - General Financial Markets

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