Academy of Economic Studies Doctoral School of Finance and Banking - DOFIN. VOLATILITY AND LONG TERM RELATIONS IN EQUITY MARKETS : Empirical Evidence from Romania, Germany and Poland. MSc . Student: Mircia Ana-Maria Supervisor: PhD. Professor Moisa Altar . July, 2009. GOALS.
VOLATILITY AND LONG TERM RELATIONS IN EQUITY MARKETS:
Empirical Evidence from
Romania, Germany and Poland
MSc. Student: Mircia Ana-Maria
Supervisor: PhD. Professor Moisa Altar
- modeling and forecasting conditional
variance of Romania, Germany and
Poland stock market indexes
The conditional variance in the GARCH(1,1) model can
be written as:
Allowing for the possibility that σ2 is not constant over time, but a time-varying trend qt, yields:
Dt is a slope dummy variable that takes the value Dt = 1 for εt < 0 and Dt = 0 otherwise, in order to capture any asymmetric responses of volatility to shocks.
BET Index the main indicator on the progression of Bucharest Stock Exchange, is a free float weighted capitalization index of the most liquid 10 companies listed on the BSE regulated market. It was launched in September 19, 1997, when its value stood at 1,000 points.
DAX Index, is the most commonly cited benchmark for measuring the returns posted by stocks on the Frankfurt Stock Exchange. Started in 1984 with a value of 1000, the index is comprised of the 30 largest and most liquid issues traded on the exchange.
WIG20 Index, the main index of Warsaw Stock Exchange is calculated based on a portfolio comprised of shares in the 20 largest and most traded companies.. The index base date is April 16, 1994; and its base value is 1, 000 points.
rt2=a + b σt2+ut
Cointegration requires the variables to be integrated of
the same order. Unit root tests are performed on each of the price index series in log first differences through the ADF test and the Phillips-Peron test:
The information criteria selects a VAR(2)
Primary finding is that a stationary long-run relationship exists between the three equity markets.
Further a VECM is created and the parsimonious model according to AIC and SC was found to be a VECM (4) with the cointegration rank =1.
VECM estimated results:
Chichester: John Wiley & Sons Ltd. 494
Journal of Financial Economics. 43: 29-77
review of the theory and empirical evidence. Journal of Econometrics. 52: 5-59.