Modeling Stock Market Monthly Returns Volatility Using GARCH Models Under Different Distributions

  • Rama Krishna Yelamanchili Associate Professor, Department of Finance and Accounting, ICFAI Business School, IFHE-Hyderabad, Hyderabad, Telangana, India
Keywords: Stock Market Returns, Stylized Facts, Volatility Models, Leverage Effect, Asymmetric Model.

Abstract

This papers aims to uncover stylized facts of monthly stock market returns and identify adequate GARCH model with appropriate distribution density that captures conditional variance in monthly stock market returns. We obtain monthly close values of Bombay Stock Exchange’s (BSE) Sensex over the period January 1991 to December 2019 (348 monthly observations). To model the conditional variance, volatility clustering, asymmetry, and leverage effect we apply four conventional GARCH models under three different distribution densities. We use two information criterions to choose best fit model. Results reveal positive Skewness, weaker excess kurtosis, no autocorrelations in relative returns and log returns. On the other side presence of autocorrelation in squared log returns indicates volatility clustering. All the four GARCH models have better information criterion values under Gaussian distribution compared to t-distribution and Generalized Error Distribution. Furthermore, results indicate that conventional GARCH model is adequate to measure the conditional volatility. GJR-GARCH model under Gaussian distribution exhibit leverage effect but statistically not significant at any standard significance levels. Other asymmetric models do not exhibit leverage effect. Among the 12 models modeled in present paper, GARCH model has superior information criterion values, log likelihood value, and lowest standard error values for all the coefficients in the model.      

 

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Published
2020-03-18
How to Cite
Yelamanchili, R. K. (2020). Modeling Stock Market Monthly Returns Volatility Using GARCH Models Under Different Distributions. International Journal of Accounting & Finance Review, 5(1), 42-50. https://doi.org/10.46281/ijafr.v5i1.425