Volatility In The Stock Market

(Alexander)Volatility is the annualized standard deviation of the returns on an investment. Volatility has major role to play in the stock markets. The heart pulse of every stock broker, I must say. The key determinant in deciding the profitability of a stock broker is volatility. If volatility persists, the broker is going to gain or lose. The returns for all of the participants in stock markets is dependent upon this one invariable factor called Volatility. Stock market participants alone are not the only ones interested in this subject, but to name a few

• Regulators, i.e. governmental agencies

• Academicians

• Hedging

Hence, the need of analysing the behaviour of volatility and its stylised facts on various indicators or indices becomes

(d) Research relating volatility spillover in general.

1.1.1. Volatility spillover in international context:

(Engle, May, 1990)This is a seminal paper in the literature of Volatility. This paper is the source of emergence of the concept of volatility spillovers. His paper seeks to clarify the origins of volatility huddling in exchange rates. Vigilant scrutiny of intra-daily exchange rates provides a test of two hypotheses: heat waves and meteor showers. A heat wave is that the volatility has only country-specific autocorrelation. Alternatively, a meteor shower is a phenomenon of intra-daily volatility spill overs from one market to the ensuing market. He uses the GARCH model to specify the heteroskedasticity across intra-daily market segments. He concludes that the empirical evidence is against the null hypothesis of the heat wave i.e. volatility is only country-specific autocorrelation. Using a volatility type of vector autoregression he examines the impact of information in one market on the time path volatility in other

KSE is Khartoum Stock Exchange, and CASE is Cairo and Alexandria Stock Exchange. The data used for the study are closing prices of the above two indices over the period from 2nd January 2006 to 30th November 2010. The paper has employed univariate specifications of the GARCH model (Generalized Autoregressive Conditional Heteroscedasticity). The study is robust in the sense that it has employed both symmetric and asymmetric models of GARCH for the analysis. The empirical results conclude that the volatility is an explosive process for KSE index returns series, while it is quite persistent for the CASE index returns series. The results also provide evidence on the existence of a positive risk premium in both markets, which supports the hypothesis of a positive correlation between volatility and the expected stock returns. Furthermore, the use of asymmetric GARCH models discovers a significant evidence for asymmetric shocks in stock returns in the two