This paper investigates the dynamic behavior of stock returns of ten market indices of Asia-Pacific countries, using symmetric GARCH and Asymmetric TARCH models for a period of 11 years from July 1994 to June 2005. The study finds an evidence of time-varying volatility, which exhibits clustering, high persistence and predictability for almost all the countries included in the sample. In agreement with other studies, the author finds the presence of a leverage effect for all markets where the conditional variance is an asymmetric function of past innovation, rising proportionately more during market declines. The findings are useful to all market participants for pricing derivatives and designing dynamic hedging strategies.

The dynamic behavior of stock index returns has been investigated extensively. As a result, several stylized facts have emerged thus far. First, at high frequencies, stock returns are positively autocorrelated. The autocorrelation in index returns has been attributed to nonsynchronous trading [e.g., Fisher (1966), Scholes and Williams (1977), Lo Mackinlay (1990)]. Second, the unconditional distributions appear to be excessively leptokurtic when compared to the normal distribution. To deal with this problem, many researchers have used more general distribution [e.g., Mandelbrot (1963), Fama (1965), Nelson (1991), Booth et al. (1992), among others]. Third, short-term returns invariably exhibit volatility clustering where tranquil periods of small returns are interspersed with volatility periods of large return. The technical term given to this is ‘Autoregressive Conditional Heteroscedasticity’ (ARCH). This type of behavior has been modeled very successfully with ARCH and GARCH models [e.g., Engle (1982), Bollerslev (1994)]. Fourth, changes in stock prices tend to be negatively related to changes in volatility [e.g., Black (1976), Christie (1982)]. This has been attributed to the leverage effect where stock price declines increase the financial leverage and consequently, the degree of risk (volatility). To capture this particular stylized fact, many researchers have developed different asymmetric GARCH models [e.g., EGARCH by Nelson (1991), TGARCH by Zakoian (1994), and GDR model by Glosten, Jagonath and Runkle (1993) among others].

The majority of studies investigating these stylized facts have concentrated on the US market, and relatively few have been concerned with other markets. This study investigates the dynamic behavior of stock index return of ten markets of Asia-Pacific countries. More specifically, the study investigates whether volatility is time-varying and predictable in these countries. For this purpose simple GARCH (1, 1) model is applied. To investigate the leverage effect, an asymmetric Threshold GARCH model is estimated. The empirical evidence suggests that volatility is time-varying and persistent for all the markets. In agreement with other studies, the conditional variance is an asymmetric function of past innovations, rising proportionately more during market declines for all markets.

Applied Finance Journal, Financial Markets, Asymmetric TARCH Models, GARCH Models, Hedging Strategies, Autoregressive Conditional Heteroscedasticity, ARCH, Capital Asset Pricing Model, Stock Market Indexes, Stock Volatility, Market Volatilities, GARCH Volatilities.