The stock volatility and contagion effect – study from pakistan
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Date
2017
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Publisher
University of Management and Technolog
Abstract
The notion of efficient market hypothesis has dominated the financial markets for a long period of time which explicitly states the prices of the securities reflect all levels of information available. This fact was pursued by many of the rational investors but in response to the global market crash, the concept of behavioral finance emerged and the patterns changed.In a decision making process, a relational financial decision maker must take into account not only returns but also the variance and volatility of returns.The primary feature of this study examine the sentiments approach and random walk theory effects on the Pakistan stock market, in addition to this, forecast the volatility of Pakistan stock exchange index by using past index values, whether such noise traders are present in the Pakistan stock exchange. Furthermore investigates the effect of the market index contagion factor, risk, return and volatility effect on Pakistan stock exchange using the GARCH estimation models. These results propose that market index and volatility have an impact and an important role in determining the dynamics on the stock returns.
In this study, quantitative methods have been adopt to investigate the research hypothesis. Time series data of stock indices from 2000 to 2015 is used to conduct this research. Augmented Dickey Fuller test (ADF), Autoregressive Integrated Moving Average (ARIMA) and Generalized Autoregressive Conditional Heteroskedasticity(GARCH) are the quantitative techniques used to measure the factors affecting the Pakistan stock market volatility, moreover for contagion affect testing the correlation coefficient test and GARCH with exogenous model are engaged on US, UK and selected Asian countries.
The analysis clearly shows that volatility trend is predictable on the basis of historical trend as variance equation of GARCH has significant positive impact. The analysis also revealed that leading stock exchange indices have strong impact on Pakistan stock market. The study support the argument for the international and national investors to hypothecate their strategies to minimize the risk. In addition of this strategy formulators may also change the results of these acquirements to inform the macro and micro stage policy making. Moreover this study is used to fill the gap between the volatility prediction and contagion factors which have significant impact on the capital market
Description
Supervised by:Dr. Safia Nosheen
Keywords
Market Risk, Market Index, Volatility, Contagion Approach, Random Walk Theory, ARCH &GARCH, MS thesis