Arch in the G7 Equity Markets: A Speculative Explanation
15 Pages Posted: 20 Jun 2002
Date Written: November 2001
This paper explores whether speculative activity can, in practice, generate the ARCH-type behavior found in financial time series. Specifically, G7 equity market indices are examined for evidence of a dynamic whereby speculative interest is self-sustaining - that is, markets can become "hot". A straightforward model, taken from Faruqee and Redding , generates some testable implications of the idea. Tests of the model on the data show that not only does the model offer an explanation for volatility clustering, but also can be considered a statistical improvement on standard GARCH representations.
JEL Classification: G12, F30, G15
Suggested Citation: Suggested Citation