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Modelling Australian Stock Market Volatility
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T.J. Brailsford and R.W. Faff
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Abstract
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The primary aim of this paper is to model movements in Australian stock market volatility using daily data over the period 1974 to 1993. In particular, we formally model volatility within the ARCH framework. A series of diagnostic tests including asymmetry based tests developed by Engle and Ng (1993), are used to assess the relative performance of several model specifications. The standard symmetric GARCH models reveal a common inability to explain the negative-size bias suggested by Engle and Ng. Glosten, Jagannathan and Runkle (GJR; 1993) modified GARCH models explicitly designed to incorporate asymmetry effects, are also estimated. Specifically, the GJR modified GARCH (3,1) version outperforms all other specifications examined.
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Keywords
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STOCK MARKET; VOLATILITY; ARCH MODELS; VOLATILITY ASYMMETRY.
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Contact Details
T.J. Brailsford
Department of Accounting and Finance
University of Melbourne
Parkville VIC 3052
R.W. Faff
Department of Accounting and Finance
Monash University
Clayton VIC 3168
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We gratefully acknowledge the helpful comments of R. Baillie, F. Black, T. Bollerslev, N. Hathaway, J. Hathaway, J. Kendall, J. Lee, K. Sawyer, R. Trevor, J. Wood (the Editor) and two anonymous referees, seminar participants at the Australian National University, Monash University, the Universities of Central Queensland, Melbourne, Queensland, Southern Queensland and Tasmania, and participants at the 1992 Annual AAANZ Conference and the Fourth Australasian Finance and Banking Conference. The first author greatly appreciates the financial assistance provided by a Coopers and Lybrand research grant.
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