Volatility Clustering, Asymmetry and Hysteresis in Stock Returns: International Evidence

Abstract

Encompassing a very broad family of ARCH-GARCH models we show that heteroskedasticity, already well documented for the US market, is a worldwide phenomenon. The AT-GARCH (1,1) model, where volatility rises more in response to bad news than to good news, and where news is considered bad only below a certain level, is found to be a remarkably robust representation of worldwide stock market returns. The residual structure is then captured by extending ATGARCH (1,1) to an hysteresis model, HGARCH, where we model structured memory effects from past innovations. Obviously, this feature relates to the psychology of the markets and the way traders process information. For the French stock market we show that a shock of either sign may affect volatility differently, depending on the recent past being characterized by either all positive or all negative returns. In the same way a longer term trend of either sign may also influence the impact on volatility of current innovations. It is found that bad news is discounted very quickly in volatility, this effect is reinforced when it comes after a negative trend in the stock index. On the opposite, good news has a very small impact on volatility except when it is clustered over a few days, which in this case reduces volatility substantially.

JEL Classification: G14, G15