Jump, Non-Normal Error Distribution and Stock Price Volatility - A Nonparamedic Specification Test

The Singapore Economic Review

Posted: 6 May 2010 Last revised: 14 May 2010

See all articles by Mohammad Masudur Rahman

Mohammad Masudur Rahman

United Nations University-Institute of Advanced Studies (UNU-IAS)

LAILA ARJUMAN ARA

WTO Research Centre, Aoyama Gakuin University

Zhenlong Zheng

Xiamen University - Department of Finance

Date Written: April 1, 2009

Abstract

This paper examines a wide variety of popular volatility models for stock index return, including Random Walk model, Autoregressive model, Generalized Autoregressive Conditional Heteroscedasticity (GARCH) model, and extensive GARCH model, GARCH-jump model with Normal, and Student t-distribution assumption as well as nonparametric specification test of these models. We fit these models to Dhaka stock return index from 20 November 1999 to 9 October 2004. There has been empirical evidence of volatility clustering, alike to findings in previous studies. Each market contains different GARCH models, which fit well. From the estimation, we find that the volatility of the return and the jump probability were significantly higher after 27 November 2001. The model introducing GARCH jump effect with normal and Student t-distribution assumption can better fit the volatility characteristics. We find that RW-GARCH-t, RW-AGARCH-t RW-IGARCH-t and RW-GARCH-M-t can pass the nonparametric specification test at 5% significance level. It is suggested that these four models can capture the main characteristics of Dhaka stock return index.

Keywords: GARCH-jump, nonparametric specification test, t-distribution

Suggested Citation

Rahman, Mohammad Masudur and ARA, LAILA ARJUMAN and Zheng, Zhenlong, Jump, Non-Normal Error Distribution and Stock Price Volatility - A Nonparamedic Specification Test (April 1, 2009). The Singapore Economic Review, Available at SSRN: https://ssrn.com/abstract=1500988

Mohammad Masudur Rahman (Contact Author)

United Nations University-Institute of Advanced Studies (UNU-IAS) ( email )

6F, International Organization Centre
Pacifico-Yokohama, Minatomirai, Nishi-ku
Tokyo, 150-8304
Japan

LAILA ARJUMAN ARA

WTO Research Centre, Aoyama Gakuin University ( email )

4-4-25 Shibuya, Shibuya-ku
Tokyo, 150-8366
Japan

Zhenlong Zheng

Xiamen University - Department of Finance ( email )

Xiamen, Fujian 361005
China

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