Volatility Modeling, Seasonality and Risk-Return Relationship in GARCH-in-Mean Framework: The Case of Indian Stock and Commodity Markets
The 5th Conference of Asia-Pacific Association of Derivatives Paper
30 Pages Posted: 4 Jun 2008 Last revised: 8 Dec 2008
Date Written: June 1, 2008
Abstract
This paper is based on an empirical study of volatility, risk premium and seasonality in risk-return relation of the Indian stock and commodity markets. This investigation is conducted by means of the General Autoregressive Conditional Heteroscedasticity in the mean model (GARCH-in-Mean) introduced by Engle et al. (1987). A systematic approach to model volatility in returns is presented. Volatility clustering and asymmetric nature are examined for Indian stock and commodity markets. The risk-return relationship and seasonality in risk-return are also investigated through GARCH-in-Mean modeling in which seasonal dummies are used for return as well as volatility equation. The empirical work has been carried out on market index S&P CNX Nifty for a period of 18 years from January 1990 to December 2007. Gold prices from 22nd July 2005 to 20th February 2008 and Soybean from October 2004 - December 2007 are also considered. The stock and commodity markets returns show persistence as well as clustering and asymmetric properties. Risk-return relationship is positive though insignificant for Nifty and Soybean where as significant positive relationship is found in the case of Gold. Seasonality in risk and return is also found which suggests the asymmetric nature of return, i.e. negative correlation between return and its volatility.
Keywords: Volatility, GARCH-in-Mean, Seasonality, S&P CNX Nifty, Gold, Soybean
JEL Classification: C22, C32
Suggested Citation: Suggested Citation
Do you have a job opening that you would like to promote on SSRN?
Recommended Papers
-
Interdependence and Dynamic Linkages between Stock Markets of Sri Lanka and Its Trading Partners
By Elyas Elyasiani, Priyal Perera, ...
-
Transmission of Stock Returns and Volatility: The Case of Korea