Original scientific paper
https://doi.org/10.1080/1331677X.2016.1197554
Pricing of risk and volatility dynamics on an emerging stock market: evidence from both aggregate and disaggregate data
Faisal Khan
Saif-Ur Rehman
Hashim Khan
Tie Xu
Abstract
This study analyses risk-return trade-off and behaviour of various
volatility dynamics including: volatility, its persistence, mean
reversion and speed of mean reversion along with asymmetry
and leverage effect on the Pakistani stock market by employing
aggregate (aggregate market level) and disaggregate (sectoral level)
monthly data for the period from 1998 to 2012. Three generalised
autoregressive conditional heteroscedasticity models were applied:
GARCH (1,1) for various volatility dynamics; EGARCH for asymmetric
and leverage effect and GARCH-M for pricing of risk. The outcomes of
the study are as follows: first, the volatility shocks are quite persistent
but with varying degrees across the sectors. Both the ARCH effect
(short-term effect) and GARCH effect (long-term effect) play their
role in generating conditional future stock returns volatility. Further,
overall the volatility process is mean reverting; however, the speed
of mean reversion varies across the sectors. Secondly, the current
study finds little evidence of asymmetry and leverage effect at both
aggregate and disaggregates data. Thirdly, the pricing of risk (positive risk premium) is also evident, particularly at the disaggregate data in the Pakistani stock market. Finally, this research study sets the implications for both the policy makers and investors.
Keywords
Asymmetry and leverage effect; stock market volatility; risks-return trade-off and GARCH models
Hrčak ID:
171771
URI
Publication date:
22.12.2016.
Visits: 1.410 *