Statistical Inadequacy of GARCH Models for Asian Stock Markets: Evidence and Implications

Lim, Kian-Ping and Hinich, M.J. and Liew, Venus Khim-Sen (2005) Statistical Inadequacy of GARCH Models for Asian Stock Markets: Evidence and Implications. Journal Of Emerging Market Finance, 4 (3). pp. 1-17. ISSN 09726527

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Official URL: http://journals.sagepub.com/doi/abs/10.1177/097265...

Abstract

This study employs the Hinich portmanteau bicorrelation test (Hinich 1996; Hinich and Patterson 1995) as a diagnostic tool to determine the adequacy of Generalised Autoregressive Conditional Heteroscedasticity (GARCH) models for eight Asian stock markets. The bicorrelation test results demonstrate that this type of model cannot provide an adequate characterisation for the underlying process of all the selected Asian stock markets. Further investigation using the windowed test procedure reveals that the violation of the covariance stationarity assumption as required by the GARCH process is due to the presence of transient epochs of dependencies in the data. The inadequacy of GARCH models has strong implications for the pricing of stock index options, portfolios selection, development of optimal hedging techniques and risk management. JEL Classification: G120, C520 Keywords: GARCH, non-stationarity, data generating process, bicorrelation, Asian stock markets

Item Type: Article
Uncontrolled Keywords: GARCH, non-stationarity, data generating process, bicorrelation, Asian stock markets, unimas, university, universiti, Borneo, Malaysia, Sarawak, Kuching, Samarahan, ipta, education, research, Universiti Malaysia Sarawak
Subjects: H Social Sciences > HB Economic Theory
Divisions: Academic Faculties, Institutes and Centres > Faculty of Economics and Business
Depositing User: ROSSAZANA AB RAHIM
Date Deposited: 17 Nov 2017 08:22
Last Modified: 17 Nov 2017 08:22
URI: http://ir.unimas.my/id/eprint/18640

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