Academic journal article International Journal of Business

Long-Range Dependence in Daily Volatility on Tunisian Stock Market

Academic journal article International Journal of Business

Long-Range Dependence in Daily Volatility on Tunisian Stock Market

Article excerpt

ABSTRACT

The aim of this paper is to surround the volatility dynamics on the Tunisian stock market via an approach founded on the detection of persistence phenomenon and long-term memory presence. More specifically, our object is to test whether long-term dependent processes are appropriated for modelling Tunisian stock market volatility. The empirical investigation has been driven on the two Tunisian stock market indexes IBVMT and TUNINDEX for the period (1998-2004) in daily frequency. Through the estimation of FIGARCH processes, we show that long-term component of volatility has an impact on stock market return series.

JEL: C22, C52

Keywords: Volatility; Long-term memory; Fractional integration; FIGARCH process

I. INTRODUCTION

Volatility persistence is a subject that has been thoroughly investigated since the introduction of ARCH models by Engle (1982). It is not only important in forecasting future market movements but also is central to a host of financial issues such as portfolio diversification, risk management, derivative pricing and market efficiency. Although, it is common to find a significant statistical relationship between current measures of volatility and lagged values, it has been very difficult to find models that adequately specify the time series dependencies in volatilities in speculative returns data. Ding, Granger and Engle (1993) show that stock market absolute returns exhibit a long-memory property in which the sample autocorrelation function decay very slowly and remain significant even at high order lags. Evidence in favour of long-range dependence in measure of volatility has been largely documented. Despite the fact that emerging markets in the last two decades had attracted the attention of international investors as means of higher returns such as with diversification of international portfolio risk. Few studies had investigated the issue of volatility persistence using nonlinear estimation models.

Emerging markets differ from developed markets. The former are in most, cases are characterized the by lack of institutional development, thinly traded markets, lack of corporate governance and market microstructure distortions. Theses factors hinder the flow of information to market participants. Moreover, in most of these markets, participants slowly react to information due to the lack of equity culture. This paper will focus on Tunisian Stock Exchange (henceforth, TSE) revisiting the issue of volatility persistence in stock market returns. We attempt to investigate empirically market returns, volatility persistence in a distinct approach from previous researches and this by testing for presence of fractional dynamics (i.e. long memory process in TSE volatility). Thus, this investigation proves to be a first essay in the Tunisian context. As we raised, the categorical absence of empirical studies founded on the fractional integrated behaviour in the conditional variance of Tunisian stock returns. Data used are the two Tunisian stock indexes (IBVMT index and TUNINDEX) daily returns during the period from December 31, 1997 till April 16, 2004. The empirical results provided evidence that the daily stock market volatility exhibits long-range dependency. The fractional integrated behaviour in the conditional variance of the daily Tunisian stock indexes have important implications on efficiency tests and on optimal portfolio allocations and consequently for optimal hedging decisions. The remaining sections are organized as follows. The next respected on the theoretical background of long memory and discusses its measurement. Section III presents some practical considerations of long memory processes. Section IV provides an overview on the Tunisian stock market while section V reviews the fractionally integrated GARCH model. Results are presented in section VI with conclusions in section VII.

II. THEORETICAL BACKGROUND

To this level, it seems to be worth to elucidate the conceptual issues of volatility, standard deviation and risk. …

Search by... Author
Show... All Results Primary Sources Peer-reviewed

Oops!

An unknown error has occurred. Please click the button below to reload the page. If the problem persists, please try again in a little while.