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The IUP Journal of Accounting Research and Audit Practices:

Risk and Prospective Returns: The Case of European and Asian Financial Markets †

Article Details

Pub. Date	: Oct, 2022
Product Name	: The IUP Journal of Accounting Research and Audit Practices
Product Type	: Article
Product Code	: IJARAP041022
Author Name	: Jatin Trivedi
Availability	: YES
Subject/Domain	: Finance
Download Format	: PDF Format
No. of Pages	: 21

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Abstract

The paper examines the use of different GARCH type models to capture the impact of normal movement and the impact during a crisis (e.g., Covid pandemic) for capturing the volatility of randomly selected stock markets in European and Asian countries. This case is based on daily data from DAX - Germany, IBEX- Spain, CAC - France, BEL - Belgium, ATX - Austria, SZSE - China, NIKKEI - Japan, KOSPI - South Korea, JKSE - Indonesia, and HANG SENG - Hong Kong. It is found that GARCH is the most robust model to estimate volatility even during a crisis period; EGARCH demonstrates persistence in volatility and capturing leverage effects; EGARCH also remains the best quality model, apart from the symmetric model. Further, the models captured difference in magnitudes of European and Asian stock markets with different volatility movement patterns. Some Asian markets showed more adverse performance than European markets during the same time-period creating differences in asset pricing, risk magnitudes and prospective returns. The study demonstrates the relative effect on asset prices and changes in values of investors and determines the parameter for risk and returns in Europe and Asia.

Introduction

Stock markets across the world reacted in panic to Covid-19 lockdown, resulting in loss of asset value, which impacted the investor community. Most European, American and Asian countries imposed lockdown, particularly from March - April 2020, and all stock markets reacted negatively to the news causing widespread investor asset value damage across the financial markets. The health of financial market indicates the stability of an economy, and it is also an important investment destination for common investors, mutual funds, and domestic and international investors. The stock markets faced wide fluctuations due to instantaneous trades that created price volatility. Particularly, during the pandemic period, panic sales and the fear of loss drove investors away from the market, resulting in large volatility shocks. However, volatility is considered as crucial with respect to risk management, asset pricing and portfolio diversification. Therefore, it becomes important to capture and understand the