Leverage Effect on the Jakarta Stock Exchange (JSX): An Investigation Using Indices Data from 1999 to 2004

Abstract

One application of numerous conditional volatility models is to predict the relationship between conditional volatility of assets' return and its risk premium. There is a need for robust conditional volatility models so that investor can estimate the appropriate risk premium of their portfolio. GARCH models seem to be successful in modeling conditional volatility of assets' return. However, variant of symmetric GARCH models fail to capture the hypothesized differential reaction which investors might exhibit to good and bad news (also known as leverage effect). This study attempts to investigate the existence of leverage effect on the JSX. After removing the predictability from indices return, symmetric GARCH and three asymmetric GARCH models are fitted to the data. The asymmetric model estimation provides little evidence on the existence of leverage effect. However, sub-sample analysis found indications that leverage effect exists on the JSX.

Keywords: asymmetric volatility, emerging market, jakarta stock exchange