“Volatility Model for emerging and emerged countries”

Research Paper report submitted in partial fulfilment of the requirements for

the degree of
Master of Business Administration

By
Shubhada Deshpande
(1827756)
Harsh Sengar
(1827813)
Selina Sourya Patnaik
(1827954)
Sharada K
(1828054)

Under the guidance of

Dr. Anirban Ghatak
Associate Professor
Institute of Management
Christ University, Bengaluru

Institute of Management
Christ University
2019
Volatility Model for emerging and emerged countries

Introduction

Evaluating country risks is a crucial exercise when choosing sites for international business,
particularly if investment is to be undertaken. Certain risks can be managed through insurance,
hedging and other types of financial planning, but other risks cannot be controlled through such
financial mechanisms. Some of these latter risks may be measured in a risk-return analysis, with
some countries’ risks requiring higher returns to justify the higher risks. The study of country risks
is also necessary in order to develop alternative scenarios: Uncertainty may remain, but it can be
transformed into planned uncertainty, with no surprises and with contingency plans in place. As
every country’s economy is different, some will be hit harder than others by various risks
depending on the state of their industries and institutions. The best way of ascertaining which are
the most significant threats, as well as how a country is preparing itself, is by conversing with
decision makers across government, business and civil society. Fiscal crises tend to be the greatest
economic risk factor in countries for which economic growth is erratic and could be derailed by
any number of national or global fiscal events. The 2008 crash is a key example, as it derailed the
economic progress of developing countries, plunging many into deep recessions. Fiscal crises are
highly unpredictable and it can be challenging for governments to know how to plan for them.
(Ahmed & Ali, 2017)2 Stock market plays an important role in any country’s economy.

Concept

The International trade has grown strongly in recent decades. The costs of this increased
growth are often discussed in the literature on international economics, particularly the
contribution of foreign trade to macroeconomic instability (Di Giovanni and Levchenko, 2009,22
2010,23 Rodrik, 199824). Macroeconomic instability is considered by several authors (Dawe
199625, Dehn 200026, Guillaumont et al., 199927, Hnatkovska and Loayza 200528) as a major
impediment to growth. Instability, manifested by large and sometimes abrupt movements in
economic variables (Plihon, 2008)29, is often explained by the relationship between country ry
and low-amplitude fluctuations of economic variables around their average value (Plihon, 2008)29.
According to Azeinman and Pinto (2005)30, Hnatkovska and Loayza (2004)28, Kraay and
Ventura (2006)31 Koren and Tenreyro (2007)32, Krishna and Levchenko (2009)33, Loayza et al.
(2007)34 and Tapia (2012)35, this risk of fluctuation is greater in developing countries than in
developed countries given their specializations in risky sectors . Thus, countries that have
specialized in particularly risky sectors will face a significant risk of macroeconomic volatility.
Lately stock market forecasting (or prediction) is one of the hottest research topics because of its
commercial applications owing to the high stakes and the kinds of lucrative benefits that it offers
(Majhi et al., 2007)1. The stock market however, has been investigated by numerous researches, is
fundamentally non-linear, nonparametric, and dynamic rather complicated environment
Akgiray (1989)3, Brooks (1996)4 and Pagan, Schwert (1989)5 presented that stock market’s
movements and fluctuations are affected by several factors like firms’ policies, political events,
general economic conditions, bank rate, commodity price index, bank exchange rate, investors’
expectations, institutional investors’ preferences, movements of stock market etc. The predicate of
returns of stock markets have showed a significant nonlinearity encouraged from an asymmetric
process (Nam et al., 2002; Nam & Kim, 2003). Forecasting and prediction of stock market returns
in today’s volatile markets have become a challenging task and represent a major task for
traditional time-series estimation.

Literature Review

Over the last two decades volatility in the financial markets Lucy and Tully (2006)18 gained
massive attention and it can be described as the measurement of the variation in the stock price
over the time and it is treated as the measurement of risk. French, Schwert and Stambauch5 (1987)
explain the relationship between volatility and stock returns and found the evidence that risk
premium is directly related with volatility. However, to directly get volatility is very hard. Busse
(1999)6 witnessed that timing of volatility is an important factor in the returns of mutual funds that
has led to higher risk-adjusted return. Brandt and Jones (2006)7 argued that financial stock’s
volatility is predictable and time-varying but estimating the future volatility level is very complex
because it is very difficult to find estimators that truly represent the parameters of volatility.
Previous research found that asset returns have leptokurtic unconditional distributions (Mandelbrot
19638, Fama 19639, Fama 196510), which is related to the time varying volatility (Corhay & Rad,
1994)11. They are characterized by volatility clustering (Mandelbrot 19638, Fama 196510). At any
time, any causal observation of financial time series reveals high and low volatility episodes
(Schwart 1989)12. This implies that volatility chocks today will influence the expectation of
volatility many periods in the future. (Black 197613, Koutmos et al., 199314, Anderson et al.,
200015) suggests that stock price movements are negatively correlated with volatility. Bekaert and
Harvey (1995)16 Emerging markets have received great attention in recent years due to many
factors. (Lo, 2000)17 First, many emerging stock markets grew fast in terms of trading volume,
number of listed companies and market capitalization. (Schwart 1989)12 Second, previous research
found a low correlation between the developed and emerging markets, which made emerging
markets interesting for portfolio diversification. In their studies Hnatkovska and Loayza (2005)36
and Rancière et al. (2008)37, classify shocks as exogenous (international trade, environmental
disasters) and endogenous (economic policy). We can distinguish the structural
vulnerability, which results from exogenous factors that are permanently independent of
the political will of the countries, from the vulnerability stemming from endogenous factors. If the
persistence of volatility shocks is long-term, then investors will require a risk premium in
their required rate of return (Corhay & Rad, 1994)11. While emerging markets are more volatile
than developed markets, they tend to be relatively overaccelerated with each other and with
developed markets. Ganger, Ding and Engle (1993)19 and contrary to popular belief modest
investment in emerging markets leads to lower, rather than higher portfolio risk Engle and
Bollerslev (1986)20. For emerging countries, the highest costs are associated with external
financial shocks (such as sudden stops in financial flows) Combes and Guillaumont 200238,
Guillaumont 200740, 200941, 201042, Loayza and Raddatz 200743), and for developing
countries, the highest cost corresponds to actual external shocks (especially in terms of
trade).Adding to this, Dikko et.al (2015)21studied volatility of stocks listed on the emerging
countries stock exchange using five asymmetric and seven asymmetric models. Out of the ten
stocks that were studied, eight of them showed high volatility.

Volatility modelling has proceeded as a field separate from asset pricing. Statistical models, such
as ARCH (Engle R. 198244, Engle R. 200245), GARCH (Bollerslev 198646), stochastic volatility
(Barndorff-Nielsen OE 200247), and option prices (Fleming J, Ostdiek B, Whaley RE 199548) are
commonly used to estimate volatility, without reference to modern asset pricing theory. As an
extension of (Bansal R, Gallant R, Tauchen G 200449) and (Bansal R, Yaron A 200450),( Tauchen
G 201151) proposes a consumption-based general equilibrium model that assumes stochastic
consumption. The model generates a two-factor structure for stock market volatility along with
time-varying risk premiums on consumptions and volatility risk, and the leverage effect. In the
general equilibrium framework, (Bansal R, Kiku D, Shaliastovich I, Yaron A 201452) demonstrate
that besides the cash flow risk and discount rate risk, volatility risk is an important and separate
risk source that cannot be ignored. In contrast to this strand of literature, we impose no assumptions
on consumption dynamics and rely only on state prices extracted from the options market.

(Britten-Jones and Neuberger 200053) use a replicating strategy to synthesize a variance swap using
options contracts, assuming continuity in the underlying asset price. (Jiang and Tian 200554) build
on a similar concept by incorporating a jump-diffusion stochastic volatility model. More recently,
(Martin 201755) proposes a market level volatility index as the price of squared returns contract
and proves it serves as the lower bound for the market risk premium. (Martin and Wagner 201856)
extend the method of , (Martin 201755)and develop a stock level volatility index and link it with
the expected stock return. Sharing the same spirit of , (Martin 201755)and the other existing
literature, we also treat volatility (or more precisely, the squared return) as an asset. However, we
adopt the general equilibrium approach and are able to construct volatility indices for assets
without the need to use traded options. In contrast, (Martin and Wagner 201856) methodology can
only be applied to individual stocks with the availability of options. Since options either do not
exist or are illiquid for most stocks/industry portfolios, our approach is more general and has a
wider application.

(L. Gang and L. Yong 201557) studies ARCH, GARCH, EGARCH, and exponential GARCH for
stock market data with sample size 2200. (Bentes 201558) studies the adequacy of GARCH-class
models in describing the gold volatility behavior and compare the out-of-sample predictive ability
models (GARCH, IGARCH and FIGARCH) based on three evaluation criterions: mean absolute
error (MAE), root mean squared error (RMSE), and Theil’s inequality coefficient (TIC) over a
long time frame of over 39 years in order to provide a general picture of the overall behavior of
the time series. (A. Joukar and I. Nahmens 201559) used ARCH and GARCH methods to determine
the persistency of volatilities. (D. S. Kambouroudis and D. G. McMillan 201560) explored the
effect of including the volatility index (VIX) as a benchmark of expected short-term market
(options and futures) and trading volume (VO) within the volatility forecasting model. (W.
Kristjanpoller and M. C. Minutolo 201561) examines the improvement of accuracy in forecasting
using a hybrid model as opposed to traditional GARCH models. (E. Abounoori, Z. Elmi, and Y.
Nademi 201662) studies forecasting the volatility of Tehran Stock Exchange (TSE) and they
concentrated on the empirical estimates of ARMA, single-regime GARCH, and MRS-GARCH
models, together with the in-the-sample and the out-of-sample forecast evaluation. (Byun 201663)
examines and predicts aggregate volatility, and the researcher developed a model of individual
returns to the study of volatility. (Bollerslev 201664) examined a new class of volatility forecasting
models and they noticed significant improvements in the accuracy of the resulting forecasts
compared to the forecasts from some of the most popular existing models. They found that the
HARQ model is slightly more subtle while the HAR places greater weight on the weekly and
monthly lags.

In the WT field, there are some results in the forecasting accuracy in the stock market data that
have been introduced such as (Wadi, Hamarsheh, and Alwadi 201365). (Al-Khazaleh, Al Wadi,
and Ababneh 201566) used financial data from ASE to test three methods (box plot, -score, and
Wavelet Transform Asymmetric Winsorized Mean (WTAWM)) for outlier detection. (Puckovs
and A. Matvejevs 201268) introduced Multifractal analysis that is provided using the so-called
Wavelet Transform Modulus Maxima approach which is beneficial for the forecasting and the
simulations of most European and Asian stock indexes. (Abbasi, M. A. Aghaei, and M. M.
Zadehfard 201569) predicts stock market index of Tehran Stock Exchange by combining of
ARIMA, neural network, and WT in order to predict trend of the market. Moreover, after intensive
research in the literature, the researcher has not found any research that combines WT with
ARIMA model in modeling and forecasting volatility of industry time series data in the content of
ASE.

The landmark contribution of (Markowitz 195270) stems from the idea that investors usually claim
higher returns on market portfolio than the investment in risk-free securities. However, the
emphasis on the association between risk and returns has been put under significant stress recently
by the financial press. This designates the significance of risk while pricing the financial assets
(Mandimika & Chinzara, 201271). More so, (Merton 197372) signified that at aggregate market
level, the required excess return is represented by a positive function of their conditional variance.

Adverse effects of low volatility on financial stability is consistent with (Brunnermeier and
Sannikov’s 201473) “volatility paradox,” where low volatility can paradoxically increase the
probability of a systemic event, and (Bhattacharya et al. 201574), who examine Minsky’s
hypothesis in a model with endogenous defaults, where agents update their optimistic expectations
during good times, increasing risk-taking. Similarly, (Danielsson et al. 201275) propose a general
equilibrium framework with risk constraints, where up on observing low volatility, agents are
endogenously incentivized to increase risk.

In the model of (Simsek 201376), optimistic agents exert a significant impact on collateralized asset
prices, ultimately increasing aggregate credit in the economy. In (Fostel and Geanakoplos 201477),
lenders feel more secure when volatility is low, which encourages them to borrow more. However,
such excessive lending may create an adverse outcome, as established in several papers.
(Greenwood and Hanson 201378) find that in such boom periods, the quality of loans is getting
increasingly poor, elevating credit risk. (Schularick and Taylor 201279) find strong support for
credit booms increasing the likelihood of a banking crisis. More recently, (Baron and Xiong
201680) study whether bank equity holders anticipate the severe consequences of credit expansions
on financial stability and whether they demand a risk premium as compensation.

(Baker et al. 201681) and (Gulen and Ion 201682) find that high stock volatility is associated with
high policy uncertainty, reducing investment, output, and employment. (Engle et al. 201383) show
that stock market volatility is related with output and inflation uncertainty. Similarly, in the real
options literature, high volatility increases the value of an option to invest, delaying investment
(Dixit and Pindyck, 199484) and adversely affecting the economy.

(Kumar 200885) opines that derivative trading helps in price discovery, improve the overall market
depth, enhance market efficiency, augment market liquidity, reduce asymmetric information and
hence the degree of volatility of the cash market decreases. (Thenmozhi 2013 86) says that the
movements in future prices provide predictable information for the movements of the index. She
also agrees that the volatility gets decreased due the introduction futures. (Shenbagaraman 200387)
has studied the impact of introduction of derivatives on the spot market volatility. The study
explained that the increased volatility of the Indian stock market was due to that increase in the
volatility of the US market. (Nath 200388) has found in his study that volatility decreases due to
introduction of derivatives. (Vipul 200789) examined the change in volatility in Indian stock market
especially after the introduction of derivatives. It was identified that there was reduction of
underlying shares after the introduction of derivatives. (Dhanaiah, Reddy and Prasad 201290) have
studied the behavior of India volatility index.

The most striking empirical regularities to emerge from this burgeon literature are: (i) volatility
appears to be highly persistent, with the longer-run dependencies well described by a fractionally
integrated process (Ding, Granger, and Engle, 199391); (Baillie, Bollerslev, and Mikkelsen,
199692); (Andersen and Bollerslev, 199793); (Comte and Renault, 199894); (ii) volatilities implied
from options prices typically exceed the corresponding subsequent realized volatilities, implying
that the reward for bearing pure volatility risk is negative on average (Bakshi and Kapadia, 200395);
(Carr and Wu 200996); (Bollerslev, Gibson, and Zhou, 201197); (iii) the volatility risk premium,
defined as the difference between options implied and realized volatilities, tends to be much less
persistent than the two individual volatility series, pointing to the existence of a fractional
cointegration type relationship (Christensen and Nielsen 200698); (Bandi and Perron, 200699); (iv)
volatility responds asymmetrically to lagged negative and positive returns, typically referred to as
a “leverage effect” (Black, 1976100); (Nelson, 1991101); (Bollerslev, Litvinova, and Tauchen,
2006102); (v) counter to the implications from a traditional risk-return tradeoff, or “volatility
feedback,” type relationship, returns are at best weakly positively related, and sometimes even
negatively related, to past 1 volatilities (French, Schwert, and Stambaugh, 1987103); (Glosten,
Jagannathan, and Runkle, 1993104); (Campbell and Hentschell, 1992105).
Behaviour of stock market is uncertain, volatile and probabilistic although it is related with the
major macroeconomic indicators of the economy Bhaumik et al (2008)114. The stability of the
stock market needs the strong capital market with high macro fundamentals. Lamoureux and
Lastrapes(1994)148In the globalization era, the international trade plays a key role in changing
stock market efficiency in the areas of banking and finance. Avramov(2006)112 The extreme
volatility in the stock market produces instability in the capital market, destabilize the value of
currency, as well as hampers international trade and finance. Karanaso and Kyrtsou
(2011)139Even, the growth and the stock market volatility are inversely related where causality
was found. Guo and Hui (2002)134A developed stock market should be fundamentally more
competitive with any other international stock markets in which floating exchange rate
mechanism is determined. Agarwal (2010)107 The monetary and trade policy of a country
crucially help in finding factors of stock market volatility to work properly although the patterns
of behavior of investors and savers of the stakeholders are unknown where Mishra et al
(2007)154the political super structure and process of the economy are given. Schwert
(1989)159But the political factors may change parametrically. Campbell et al (1993)118This paper
evaluated the studies of the major works on stock market volatility on such multidimensional
issues.

"Volatility is basically a function of uncertainty."-say ‘s John Bollinger. Raunig et al (2010)156

Volatility can either be measured by using the standard deviation or variance between returns
from that same security or market index. Mubarik and Javid(2009)155Commonly, the higher the
volatility, the riskier is the security. One measure of the relative volatility of a particular stock to
the market is its beta. A beta approximates the overall volatility of a security's returns against the
returns of a relevant benchmark (usually the S&P 500 is used).Choi et al (2012)122 For example,
a stock with a beta value of 1.1 has historically moved 110% for every 100% move in the
benchmark, based on price level. Conversely, a stock with a beta of .9 has historically moved
90% for every 100% move in the underlying index. Giot et al(2010)130Volatility is measured by
the Chicago Board of Options Exchange (CBOE), primarily through the CBOE Volatility Index
(VIX) and, to a lesser extent, the CBOE Nasdaq Volatility Index (VXN) for technology stocks.
Joshi (2011)135Seasoned traders who monitor the markets closely usually buy stocks a.nd index
options when the VIX is high. When the VIX is low, it usually indicates that investors believe
the market will head higher. Voth and Hans (2002)161The standard deviation tells us how tightly
the price of a stock is grouped around the mean or moving average (MA). . Mubarik et al
(2009)155When the prices are tightly bunched together, the standard deviation is small. When the
price is spread apart, you have a relatively large standard deviation. Kyrtsou, C and M. Terraza
(2003)146For securities, the higher the standard deviation, the greater the dispersion of returns
and the higher the risk associated with the investment. Eichengreen and Tong (2003)128As
described by modern portfolio theory (MPT), volatility creates risk that is associated with the
degree of dispersion of returns around the average. In other words, the greater the chance of a
lower-than-expected return, the riskier is the investment. Bloomfield (2009)115Volatility tends to
decline as the stock market rises and increase as the stock market falls. When volatility increases,
risk increases and returns decrease. Risk is represented by the dispersion of returns around the
mean. . Karanasos and Kartsaklas (2004)138The greater the dispersion of returns around the
mean, the larger is the drop in the compound return. Samanta (2010) 158Crestmont Research used
the average range for each day to measure the volatility of the Standard & Poor's 500 Index
(S&P 500) index. Kim,Kenneth (2001)141Their research tells us that higher volatility corresponds
to a higher probability of a declining market. Lower volatility corresponds to a higher probability
of a rising market. The VIX is used as a tool to measure investor risk. Caporale et al (2011) 120 A
high reading on the VIX marks periods of higher stock market volatility. This high volatility also
aligns with stock market bottoms. Mubarik et al (2009)155 Low readings on the VIX mark
periods of lower volatility. As a general trend, when the VIX rises the S&P 500 drops. When the
VIX is at a high, the S&P 500 is at a low, which may be a good time to buy. The higher level of
volatility that comes with bear markets has a direct impact on portfolios. Kaniel et al (2008)136It
also adds to the level of concern and worry on the part of investors as they watch the value of
their portfolios move more violently and decrease in value

Christiano et al. (2008)124 find that the implementation of accommodative monetary policy can
signal that a rebound of the stock market is just around the corner, and the imperfect rationality of
investors can make the stock market fluctuate more frequently than is usual. Assogbav and Tov
(1995)110To date, the literature has come to a general consensus that stock market volatility has a
negative effect on the recovery of the real economy. For example, Bernanke and Gertler (1999) 124
and Cecchetti et al. (2000) 121 provide distinct conclusions. Bernanke and Gertler (1999) 124 explore
how the macro economy is affected by alternative monetary policy rules either with or without the
stock market volatility being taken into account. Schwert (1989)159Their results suggest that it is
desirable for central banks to focus on inflationary pressures while stock market volatility becomes
relevant only if it signals potential inflationary or deflationary forces. Assogbavi and Tov (1995)110
Therefore, monetary policy with additional focus on stock market volatility does not benefit the
economy in any significant manner. However, Cecchetti et al. (2000) 121 raise several objections
to Batra and Amita (2004)113 conclusion. Cecchetti et al. (2000) 121 believe that one of the final
goals of monetary policy is to maintain a stable financial system. Large fluctuations in the stock
market can cause adverse shock to the real economy. Zang et al. (2011)164Therefore, central banks
should not only concentrate on inflation and real economic growth, but also set a goal to react to
the stock market volatility. In addition, Gilchrist and Saito (2006) 129 employs a general equilibrium
model on the basis of the Real Business Cycle theory and shows that it is necessary for monetary
policy to consider stock market volatility. Voth et al (2002)161However, Mei et al (2003)152leverage
has no impact on asymmetric volatility at the daily frequency and, moreover, we observe
asymmetric volatility for stocks with no leverage. Agarwal et al. (1995) 106 Also, expected returns
may vary with the business cycle, that is, at a lower than daily frequency. Bloomfield et al
(2009)115Trading activity of contrarian and herding investors has a robust effect on the relationship
between daily volatility and lagged return. . Kyrtsou and Terraza(2002)145Consistent with the
predictions of the rational expectation models, the non-informational liquidity-driven (herding)
trades increase volatility following stock price declines, and the informed (contrarian) trades
reduce volatility following stock price increases. The results are robust to different measures of
volatility and trading activity Romer (1990)157 suggest that financial integration (due mainly to the
removal of capital controls) is responsible for an increase in the relative volatility of consumption
and asset returns, especially in countries that have liberalized their capital accounts only relatively
recently and partially. . Khalid et al. (2010)140When negative shocks hit these countries, these
authors observe, they tend to lose access to international capital markets. The rapid reversal of
capital flows in response to these events amplifies the volatility of their consumption and asset
market outcomes. Dellas and Hess(2002) 127, on the other hand, find that the removal of capital
controls is associated with less output and stock market volatility. Avramov et al(2006)112This runs
counter to the thesis that financial integration increases stock market volatility.

Using 50 Indian stocks, Kumar and Sing (2011)144 analyze the returns and volume relationship,
focusing on the contemporaneous relation between absolute returns and trading volume, the
asymmetric behavior of trading volume in response to price changes and dynamic (lead-lag)
relationship between returns and trading volume. Schwert, and William (1989 )160, They model
the dynamic relationship using VAR model. This study also investigates the contemporaneous
relationship between volatility and trading volume. Lamoureax and Lastrapes (1990) 148 supported
the influence of trading volume on the persistence of GARCH effects on the returns of the financial
assets. Caporale et al (2009)120Their findings indicate evidence of positive contemporaneous
correlation between absolute price changes and trading volume in Indian stock markets.
Eichengreen et al (2003)128 However, they get mixed result on asymmetric relationship between
trading volume and returns. Most of the stocks show asymmetric behavior which is in line with
the findings of Assogbavi et al. (1995) 110 and Brailsford (1996) 117. Some of the stocks, where we
do not find asymmetric behavior, are consistent with the findings of Assogbavi (2007) 111 that
clearly indicated the absence of asymmetric relationship in emerging markets. Kose (2003)143The
results of dynamic relationship between returns and trading volume show very interesting results.
They find strong evidence that in Indian market, past returns Granger cause trading volume, which
can easily conceived in an emerging market (Assogbavi, 2007) 111 where the state of development
of the market possibly does not allow instantaneous information dissemination. Their results are
further supported by the variance decomposition. However, Mele and Antonio (2007)153in most of
the cases the relationship lacks economic significance even when statistically significant. Yalcin
et al (2006)163The results of impulse response analysis indicate that both returns and volume are
mostly affected by their own lag and the volume is more autoregressive than returns i.e. any shock
in either returns or volume does not affect the return series beyond one lag.

Research Gap

In all of the papers referred we found out that there is a significant effect of volatility on the
emerging country’s growth and market but there is not much work done combining and comparing
both emerged markets and emerging markets. Thus, in this paper we aim at connecting the gap
between the emerged markets and emerging markets by analyzing the country’s indices volatility
pattern and developing a model to predict the same.

What are we going to do

Implication

Social: Financial systems can contribute to economic development by providing people with
useful tools for risk management, but when they fail to manage the risks they retain, they can create
severe financial crises with devastating social and economic effects. The financial crisis that hit
the world economy in 2008–2009 has transformed the lives of many individuals and families, even
in advanced countries, where millions of people fell, or are at risk of falling, into poverty and
exclusion. For most regions and income groups in developing countries, progress to meet the
Millennium Development Goals by 2015 has slowed and income distribution has worsened for a
number of countries. (Ötker-Robe, 2008165) Countries hardest hit by the crisis lost more than a
decade of economic time. As the efforts to strengthen the financial systems and improve the
resilience of the global financial system continue around the world, the challenge for policy makers
is to incorporate the lessons from the failures to take into consideration the complex linkages
between financial, fiscal, real, and social risks and ensure effective risk management at all levels
of society. The recent experience underscores the importance of: systematic, proactive, and
integrated risk management by individuals, societies, and governments to prepare for adverse
consequences of financial shocks; mainstreaming proactive risk management into development
agendas; establishing contingency planning mechanisms to avoid unintended economic and social
consequences of crisis management policies and building a better capacity to analyze complex
linkages and feedback loops between financial, sovereign, real and social risks; maintaining fiscal
room; and creating well-designed social protection policies that target the vulnerable, while
ensuring fiscal sustainability.

Economical: There are many factors that can be treated as economic growth determinants. One of
these factors is the financial system. The institutional framework of the financial system as well as
its performance are no doubt important determinants of output growth. The theoretical structural
model implies that the development and stability of the financial sector both have a positive impact
on economic growth. (Prochniak and Wasiak, 2017166) Three recent trends have spurred the debate
about financial reporting and disclosure regulations around the world. First, international financial
crises and corporate scandals often bring about securities regulation reforms and greater reporting
and disclosure requirements. The Asian Financial Crisis of 1997, the Enron debacle in the U.S.,
and the recent credit market crisis are but a few important examples. In the aftermath of these
events, regulators and policy makers have called for improved corporate transparency, increased
scrutiny and often enacted significant changes to accounting and disclosure requirements and
regulations. Second, stock exchanges and accounting standards bodies from numerous countries
around the world have adopted International Financial Reporting Standards (IFRS) to achieve the
stated goal of “harmonization” and “convergence” of accounting rules. Third, both the debate
about the competitiveness of U.S. capital markets and the increasing internationalization of capital
markets highlight securities regulation as a global issue. (Leuz and Wysocki, 2008167) This
research paper would help predict volatility in the emerging and emerged markets. Volatility being
a very important determinant of the economic state of any country, would help determine any
impending crisis.

Practical
The market index is one of the most important indicators that any investor looks at to determine
the performance of an economy. Every country is subjected to different kinds of risk among which
political risk affects the most. This in turn affects the country’s economy and stock market. Hence,
through this paper we intend to address this risk and its effect on the economy by developing a
model to forecast the volatility. The model can be used to predict the existence of volatility in the
market. This in turn can help find out any impeding crisis. Therefore, the model in this paper can
detect the financial health of an economy.

Research Methodology

Problem Statement:

Market risk is one of the main sources of uncertainty for any financial institution that holds risky
assets. In general, market risk refers to the possibility that the portfolio value will decrease due to
the changes in market factors. There are a number of approaches to estimate the exposure of the
financial institution to the market risk. The Value‐at‐Risk methodology is the most heavily used
one for the estimates of the market risk in practical applications (Ladokhin, 2009168). Volatility
smiles of European swaptions of various expiries and maturities typically have different slopes.
This important feature of interest rate markets has not been incorporated in any of the practical
interest rate models available to date (Piterbarg, 2003169). Although the generalised autoregressive
conditional heteroskedasticity (GARCH) model has been quite successful in capturing important
empirical aspects of financial data, particularly for the symmetric effects of volatility, it has had
far less success in capturing the effects of extreme observations, outliers and skewness in returns
(Verhoevena and McAleerb, 2004170). A volatility model must be able to forecast volatility. This
is the central requirement in almost all financial applications. There are two general classes of
volatility models in widespread use. The first type formulates the conditional variance directly as
a function of observables. The simplest examples are the autoregressive conditional
heteroscedasticity (ARCH) and generalized autoregressive conditional heteroscedasticity
(GARCH) models. The second general class formulates models of volatility that are not functions
purely of observables (Engle and Patton, 2007171).

A number of stylized facts about the volatility of financial asset prices have emerged over the
years. A good volatility model must be able to capture and reflect these stylized facts. The classical
volatility models, such as GARCH, are return-based models, which are constructed with the data
of closing prices. It might neglect the important intraday information of the price movement, and
will lead to loss of information and efficiency. This study introduces and extends the range-based
autoregressive volatility model to make up for these weaknesses. The empirical results consistently
show that the new model successfully captures the dynamics of the volatility and gains good
performance relative to GARCH model.

Research Question: Can there be a model which would help in predicting volatility of stock
indices in emerged or emerging markets?

Objective:

Even though work has been done on individual economies and derivatives to predict credit crises,
there has been no comparative studies done. Additionally, emerging markets have not been
explored in this respect. This paper aims to create a credit crash model for emerging and emerged
markets and find a comparison between the same. For emerged markets, market index data for US,
UK and Germany are used and for emerging markets market index India, Brazil and Korea are
taken.

Methodology:

Panel Data: Panel data, also known as longitudinal data or cross-sectional time series data in some
special cases, is data that is derived from a (usually small) number of observations over time on a
(usually large) number of cross-sectional units like individuals, households, firms, or governments.
It is a statistical method, widely used in social science, epidemiology, and econometrics to analyze
two-dimensional (typically cross sectional and longitudinal) panel data. The data are usually
collected over time and over the same individuals and then a regression is run over these two
dimensions. Panel data allows you to control for variables you cannot observe or measure like
cultural factors or difference in business practices across companies; or variables that change over
time but not across entities (i.e. national policies, federal regulations, international agreements,
etc.). This is, it accounts for individual heterogeneity. With panel data you can include variables
at different levels of analysis (i.e. students, schools, districts, states) suitable for multilevel or
hierarchical modeling.
Some drawbacks are data collection issues (i.e. sampling design, coverage), non-response in the
case of micro panels or cross-country dependency in the case of macro panels (i.e. correlation
between countries).

A growing body of the panel-data literature concludes that panel-data models are likely to exhibit
substantial cross-sectional dependence in the errors, which may arise because of the presence of
common shocks and unobserved components that ultimately become part of the error term, spatial
dependence, and idiosyncratic pairwise dependence in the disturbances with no particular pattern
of common components or spatial dependence Robertson and Symons (2000172), Pesaran
(2004173), Anselin (2001174), and Baltagi (2005, sec. 10.5175).

If we assume that cross-sectional dependence is caused by the presence of common factors, which
are unobserved (and the effect of these components is therefore felt through the disturbance term)
but uncorrelated with the included regressors, the standard fixed-effects (FE) and random-effects
(RE) estimators are consistent, although not efficient, and the estimated standard errors are biased.
Thus, different possibilities arise in estimation. For example, one may choose to retain the FE/RE
estimators and correct the standard errors by following the approach proposed by Driscoll and
Kraay (1998176).1 This method can be implemented in Stata by using the command xtscc, which
is forthcoming to Statalist by Daniel Hoechle. Or, one may attempt to obtain an efficient estimator
in the first place by using the methods put forward by Robertson and Symons (2000177) and
Coakley, Fuertes, and Smith (2002178). The impact of cross-sectional dependence in dynamic panel
estimators is more severe. In particular, Phillips and Sul (2003179) show that if there is sufficient
cross-sectional dependence in the data and this is ignored in estimation (as it is commonly done
by practitioners), the decrease in estimation efficiency can become so large that, in fact, the pooled
(panel) least-squares estimator may provide little gain over the single-equation ordinary least
squares.

Dealing specifically with short dynamic panel-data models, Sarafidis and Robertson (2006180)
show that if there is cross-sectional dependence in the disturbances, all estimation procedures that
rely on IV and the generalized method of moments (GMM)—such as those by Anderson and Hsiao
(1981181), Arellano and Bond (1991182), and Blundell and Bond (1998183)—are inconsistent as N
(the cross-sectional dimension) grows large, for fixed T (the panel’s time dimension).
Fixed-effects (FE) is used whenever you are only interested in analyzing the impact of variables
that vary over time. FE explores the relationship between predictor and outcome variables within
an entity (country, person, company, etc.). Each entity has its own individual characteristics that
may or may not influence the predictor variables (for example, being a male or female could
influence the opinion toward certain issue; or the political system of a particular country could
have some effect on trade or GDP; or the business practices of a company may influence its stock
price).

When using FE we assume that something within the individual may impact or bias the predictor
or outcome variables and we need to control for this. This is the rationale behind the assumption
of the correlation between entity’s error term and predictor variables. FE remove the effect of those
time-invariant characteristics so we can assess the net effect of the predictors on the outcome
variable.

Another important assumption of the FE model is that those time-invariant characteristics are
unique to the individual and should not be correlated with other individual characteristics. Each
entity is different therefore the entity’s error term and the constant (which captures individual
characteristics) should not be correlated with the others. If the error terms are correlated, then FE
is no suitable since inferences may not be correct and you need to model that relationship (probably
using random-effects).

Variables:

The data has been collected for a period of 5 years from 17th October 2014 to 16th October 2019
covering almost 1300 days. To do the analysis Indices of 5 emerging countries: BOVESPA
(Brazil), RTS (Russia), SENSEX (India), Shanghai SE (China) and FTSE/JSE (South Africa) and
indices of 5 emerged countries: Nikkei (Japan), CAC-40 (France), Dow Jones (USA), FTSE (UK),
and DAX (Germany).

In this paper, closing price of stock exchange fix of 10 countries has been taken as dependent
variable and 5 other independent variables: GDP growth rate, 10 Year G-Sec, Inflation Rate, Net
National Income and foreign direct investment (net) was collected.
Dependent Variable:

Market Return

The dictionary definition of Market Return is the return on the overall theoretical market portfolio
which includes all assets and having the portfolio weighted for value. A stock index can give you
a good idea of how the overall stock market, or a certain portion of the stock market is performing.
The Dow Jones Industrial Average is perhaps the best-known index, but isn't widely considered to
be a great snapshot of the entire market, as it consists of only 30 companies.

Other popular market indices include the S&P 500, which is generally considered to be a great
indicator of how the overall market is performing, the tech-heavy NASDAQ Composite index, and
the Russell 2000 index, a broad index of small cap companies. There are also indices for individual
sectors, such as technology, healthcare, and finance, which can help track the performance of
certain types of companies.

Indices can also be useful for measuring the performance of your own portfolio against a
benchmark. For example, if your stock portfolio drops by 7% in a certain month, but the S&P 500
drops by 10%, you are still beating the market even though the value of your holdings fell.

To calculate the return of a stock index between any two points in time, the following steps are
followed:

First, the price level of the chosen index on the first and last trading days of the period are found.
The opening price on the first day and the closing price on the last are generally considered in
order to make sure the calculation is as accurate as possible. Next, the starting price is subtracted
from the ending price to determine the index's change during the time period. Finally, divide the
index's change by the starting price, and multiply by 100 to express the index's return as a
percentage.

Putting the formula together, we have:

Return = Ending Price-Starting Price/Starting Price X 100

A positive percentage indicates that the index increased during the time period, while a negative
percentage indicates that the index fell.

There have also been studies investigating the time-series behavior of stock prices in terms of
volatility. Among these, we can mention French et al. (1987187), Campbell and Hentschel
(1992188), Glosten et al. (1993189), Nelson (1991190), Baillie and DeGennaro (1990191), Chan,
Karolyi and Stulz (1992192), and Corhay and Rad (1994193). French et al. (1987194) reported that
unexpected stock--market returns are negatively associated with unexpected changes in return
volatility. Similarly, Campbell and Hentschel (1992195) argued that the required rate of return on
common stocks increases with an increase in stock--market volatility, thus lowering stock prices.
Glosten et al. (1993196) and Nelson (1991197) reported that positive unanticipated returns decrease
the conditional volatility while negative ones increase it.

Independent Variables:

GDP

Gross Domestic Product (GDP) is the total monetary or market value of all the finished goods and
services produced within a country's borders in a specific time period. As a broad measure of
overall domestic production, it functions as a comprehensive scorecard of the country’s economic
health.

The components of GDP include personal consumption expenditures plus business investment
plus government spending plus (exports minus imports). Now that you know what the components
are, it's easy to calculate a country's gross domestic product using this standard formula: C + I +
G + (X - M).

There are several types of GDP measurements:

 Nominal GDP is the measurement of the raw data.

 Real GDP takes into account the impact of inflation and allows comparisons of economic
output from one year to the next and other comparisons over periods of time.
 GDP growth rate is the increase in GDP from quarter to quarter.
  GDP per capita measures GDP per person in the national populace; it is a useful way to
compare GDP data between various countries.

GDP impacts personal finance, investments, and job growth. Investors look at a nations' growth
rate to decide if they should adjust their asset allocation. They also compare country growth rates
to find their best international opportunities. They purchase shares of companies that are in rapidly
growing countries. One of the biggest criticisms of GDP it that it doesn't count the environmental
costs. For example, the price of plastic is cheap because it doesn't include the cost of pollution.
GDP doesn't measure how these costs impact the well-being of society. A country will improve its
standard of living when it factors in environmental costs.

Another criticism is that GDP doesn't include unpaid services. It leaves out child care and unpaid
volunteer work. As a result, the economy undervalues these contributions to the quality of life.

GDP also does not count the shadow or black economy. GDP underestimates economic output in
countries where a lot of people receive their income from illegal activities. These products aren't
taxed and don't show up in government records. The government estimates, but cannot accurately
measure, this output. Global Financial Integrity estimated the black market contributed up to $2.2
trillion to the $128 trillion global economy in 2017 (Brezina, 2012186).

Here Real GDP of the countries have been taken into account.

H0: GDP cannot predict Volatility in market indices.

H1: GDP can predict Volatility in market indices

G-Securities Yield

In the investing world, government security applies to a range of investment products offered by
a governmental body. Government securities come with a promise of the full repayment of
invested principal at maturity of the security. Some government securities may also pay periodic
coupon or interest payments. These securities are considered conservative investments with a low-
risk since they have the backing of the government that issued them.

Government securities are debt instruments that a sovereign government. They sell these products
to finance day-to-day governmental operations and provide funding for special infrastructure and
military projects. These investments work in much the same way as a corporate debt issue.
Corporations issue bonds as a way to gain capital for buying equipment, funding expansion, and
paying off other debt. By issuing debt, governments can avoid hiking taxes or cutting other areas
of spending in the budget each time they need additional funds for a project.

After issuing government securities, individual and institutional investors will buy them to either
hold until maturity or sell to other investors on the secondary bond market. Investors buy and sell
previously issued bonds in the market for a variety of reasons. They may be looking to earn interest
income from the bond's periodic coupon payments or to allocate a portion of their portfolio into
conservative risk-free assets. These investments are often considered a risk-free investment
because when it comes time for redemption at maturity, the government can always print more
money to satisfy the demand.

The government controls the flow of money through many policies, one of which is the selling of
government bonds. As they sell bonds, they reduce the amount of money in the economy and push
interest rates upward. The government can also repurchase these securities, affecting the money
supply and influencing interest rates. Called open market operations (OMO) the government buys
bonds on the open market, reducing their availability and pushing the price of the remaining bonds
up.

As a bond prices rise, bond yields fall driving interest rates in the overall economy lower. New
issues of government bonds are also issued at lower yields in the market further driving down
interest rates. As a result, the government can significantly impact the trajectory of interest rates
and bond yields for many years.

The supply of money changes with this buying and selling, as well. When the Fed repurchases
Treasuries from investors, the investors deposit the funds in their bank or spend the money
elsewhere in the economy. This spending, in turn, stimulates retail sales and spurs economic
growth. Also, as money flows into banks through deposits, it allows those banks to use those funds
to lend to businesses or individuals, further stimulating the economy.
The government securities yield is considered a market performance indicator. If market interest
rate levels rise, the price of a bond falls. Conversely, if interest rates or market yields decline, the
price of the bond rises. In other words, the yield of a bond is inversely related to its price.

Yield = [Discount Value]/[Bond Price] * [365/number of days to maturity]

The relationship between yield to maturity and coupon rate of bond may be stated as follows:

 When the market price of the bond is less than the face value, i.e., the bond sells at a
discount, YTM > > coupon yield.
 When the market price of the bond is more than its face value, i.e., the bond sells at a
premium, coupon yield > > YTM.
 When the market price of the bond is equal to its face value, i.e., the bond sells at par, YTM
= coupon yield.

H0: 10 Year G-Sec cannot predict Volatility in market indices.

H1: 10 Year G-Sec can predict Volatility in market indices

Inflation Rate

Inflation is a quantitative measure of the rate at which the average price level of a basket of selected
goods and services in an economy increases over a period of time. It is the constant rise in the
general level of prices where a unit of currency buys less than it did in prior periods. Often
expressed as a percentage, inflation indicates a decrease in the purchasing power of a nation’s
currency.

As prices rise, a single unit of currency loses value as it buys fewer goods and services. This loss
of purchasing power impacts the general cost of living for the common public which ultimately
leads to a deceleration in economic growth. The consensus view among economists is that
sustained inflation occurs when a nation's money supply growth outpaces economic growth.

To combat this, a country's appropriate monetary authority, like the central bank, then takes the
necessary measures to keep inflation within permissible limits and keep the economy running
smoothly.
Inflation is measured in a variety of ways depending upon the types of goods and services
considered and is the opposite of deflation which indicates a general decline occurring in prices
for goods and services when the inflation rate falls below 0%.

Depending upon the selected set of goods and services used, multiple types of inflation values are
calculated and tracked as inflation indexes. Most commonly used inflation indexes are the
Consumer Price Index (CPI) and the Wholesale Price Index (WPI).

The Consumer Price Index: The CPI is a measure that examines the weighted average of prices of
a basket of goods and services which are of primary consumer needs. They include transportation,
food, and medical care. CPI is calculated by taking price changes for each item in the
predetermined basket of goods and averaging them based on their relative weight in the whole
basket. The prices in consideration are the retail prices of each item, as available for purchase by
the individual citizens. Changes in the CPI are used to assess price changes associated with the
cost of living, making it one of the most frequently used statistics for identifying periods of
inflation or deflation.

The Wholesale Price Index: The WPI is another popular measure of inflation, which measures and
tracks the changes in the price of goods in the stages before the retail level. While WPI items vary
from one country to other, they mostly include items at the producer or wholesale level. For
example, it includes cotton prices for raw cotton, cotton yarn, cotton gray goods, and cotton
clothing.

The Producer Price Index: The producer price index is a family of indexes that measures the
average change in selling prices received by domestic producers of goods and services over time.
The PPI measures price changes from the perspective of the seller and differs from the CPI which
measures price changes from the perspective of the buyer.
In all such variants, it is possible that the rise in the price of one component (say oil) cancels out
the price decline in another (say wheat) to a certain extent. Overall, each index represents the
average weighted cost of inflation for the given constituents which may apply at the overall
economy, sector or commodity level.

This paper used CPI as an indicator. This indicator is calculated by using the Price Index Numbers
(PINs) method.

Through PINs:
Inflation is measured by calculating the changes occurred in PINs over a passage of time. The
rate of inflation can be calculated by taking the percentage rate of change in the price index for a
given period of time.

The formula used for calculating inflation through PINs is as follows:

Rate of Inflation = PINt-PINt-1/PINt-1 * 100

H0: Inflation Rate cannot predict Volatility in market indices.

H1: Inflation Rate can predict Volatility in market indices

Net National Income

Net National Income or Net national product (NNP) is the monetary value of finished goods and
services produced by a country's citizens, overseas and domestically, in a given period. It is the
equivalent of gross national product (GNP), the total value of a nation's annual output, minus the
amount of GNP required to purchase new goods to maintain existing stock, otherwise known as
depreciation.

NNP is often examined on an annual basis as a way to measure a nation's success in continuing
minimum production standards. It can be a useful method to keep track of an economy as it takes
into account all its citizens, regardless of where they make their money, and acknowledges the fact
that capital must be spent to keep production standards high.

The NNP is expressed in the currency of the nation it represents. That means that in the United
States the NNP is expressed in dollars (USD), while for European Union (EU) member nations the
NNP is expressed in euros (EUR).
The NNP can be extrapolated from the GNP by subtracting the depreciation of any assets. The
depreciation figure is determined by assessing the loss of the value of assets attributed to normal
use and aging.

The formula for NNP is:

NNP=MVFG+MVFS−Depreciation
where:
MVFG=market value of finished goods
MVFS=market value of finished services

The relationship between a nation's GNP and NNP is similar to the relationship between its gross
domestic product (GDP) and net domestic product (NDP).

H0: Net National Income cannot predict Volatility in market indices.

H1: Net National Income can predict Volatility in market indices

Foreign Direct Investment

A foreign direct investment (FDI) is an investment made by a firm or individual in one country
into business interests located in another country. Generally, FDI takes place when an investor
establishes foreign business operations or acquires foreign business assets in a foreign company.
However, FDIs are distinguished from portfolio investments in which an investor merely
purchases equities of foreign-based companies. Foreign direct investments are commonly
categorized as being horizontal, vertical or conglomerate. A horizontal direct investment refers to
the investor establishing the same type of business operation in a foreign country as it operates in
its home country, for example, a cell phone provider based in the United States opening stores in
China. A vertical investment is one in which different but related business activities from the
investor's main business are established or acquired in a foreign country, such as when a
manufacturing company acquires an interest in a foreign company that supplies parts or raw
materials required for the manufacturing company to make its products. A conglomerate type of
foreign direct investment is one where a company or individual makes a foreign investment in a
business that is unrelated to its existing business in its home country. Since this type of investment
involves entering an industry in which the investor has no previous experience, it often takes the
form of a joint venture with a foreign company already operating in the industry.
The outward FDI stock is the value of the resident investors' equity in and net loans to enterprises
in foreign economies. The inward FDI stock is the value of foreign investors' equity in and net
loans to enterprises resident in the reporting economy. FDI stocks are measured in USD and as a
share of GDP.

The definition of FDI is not only limited to a simple transfer of money, but has now extended to
being defined as a measure of foreign ownership of domestic productive assets such as factories,
land and organizations and other intangible assets like technologies, marketing skills and
managerial capabilities. There has been an evident increase in the inflows of FDI in India which
continued to rise to peaks till 2008. According to various studies, currently India is among the top
5 preferred destinations for FDI. (Ansari and Ranga, 2010184). Hooda (2011185) through her study
of FDI and Indian economy concluded that her results obtained from the Economic Growth Model
and Foreign Direct Investment Model show that FDI enhances the financial position of India by
providing a sound base for economic growth and development of the country. FDI not only
contributes to the GDP but also to the foreign exchange reserves of the country.

H0: Foreign Direct Investment cannot predict Volatility in market indices.

H1: Foreign Direct Investment can predict Volatility in market indices

Data Analysis

The data analysis is conducted in two parts. The first part for emerged countries and the second
part for emerging countries.

Emerged Countries: The Jarque-Bera test of normality gives a p-value of 0.00 which is less than
0.05. Therefore, it can be said that the data follows gaussian distribution. However, the Jarque-
Bera value of 21633248 is abnormally high than the required 450. Moreover, the kurtosis value is
290.4403, which is very high than the mesokurtic level of 3, explaining that the data follows
leptokurtic distribution. Leptokurtic distribution indicates very high risk in the market.
As observed in the residual graph the actual and the fitted data are almost same. This implies that
the Panel data is strong. However, the straight blue line of residuals suggests that the data is
homoscedastic. Such kind of situations are considered too good to be true and indicates that there
is some level of manipulation in the market.
On the first iteration panel data regression itself, it is confirmed that 10-year bond yield, adjusted
net national income, foreign direct investment, GDP and CPI inflation have the high effect on the
closing price of stock exchange fix. It is proved by the less than 5, p-values for all of the variables.

Since the data follows Gaussian distribution, R2 can be considered to test the robustness of the
model. The .2126 value of R2 suggests that the model will be able to correctly predict results 21.26
times out of 100 times. That is the model will not be able to predict the efficiently.

The Durbin-Watson statistic of 2.145103 gives a λ value of -0.0725515 indicating a negative

correlation between the variables.

The model for predicting volatility in emerged markets

Log Return = -0.0028 – 0.0009 10 Year Bond Yield – 0.00113 Net National Income -2.03 FDI +
0.0015 GDP – 0.038848 Inflation
In order for the forecast of a model to be robust at least three out of the Mean Absolute Error,
Mean Absolute Percentage Error, Root Mean Square Error and Theil Inequality Coefficient should
be at least less than 1. The forecasting is also proved to be robust as 3 out of the 4 parameters of
Mean Absolute Error, Mean Absolute Percentage Error, Root Mean Squared Error and Theil
Inequality Coefficient are below 1. Additionally, the bias proportion is nil indicating that there is
no behavioral biasness in the said markets.

From the above analysis it can be safely said that the variables used for the model cannot
successfully help in predicting the volatility in the markets.

Emerging Countries: The Jarque-Bera test of normality gives a p-value of 0.00 which is less than
0.05. Therefore, it can be said that the data follows gaussian distribution. However, the Jarque-
Bera value of 6692.348 is abnormally high than the required 450. Moreover, the kurtosis value is
8.07, which is high than the mesokurtic level of 3, explaining that the data follows leptokurtic
distribution. Leptokurtic distribution indicates very high risk in the market.
As observed in the residual graph the actual and the fitted data are almost same. This implies that
the Panel data is strong. However, the blue line of residuals suggests that the data is not
homoscedastic. Such kind of situations are considered to indicate normal situations in market and
make them predictable.
On the first iteration panel data regression itself, it is confirmed that 10-year bond yield, adjusted
net national income, foreign direct investment, GDP and CPI inflation have the high effect on the
closing price of stock exchange fix. It is proved by the less than 5, p-values for all of the variables.

Since the data follows Gaussian distribution, R2 can be considered to test the robustness of the
model. The .4609 value of R2 suggests that the model will be able to correctly predict results 46.09
times out of 100 times. That is the model will not be able to predict the efficiently.

The Durbin-Watson statistic of 1.993119 gives a λ value of 0.0034405 indicating a positive

correlation between the variables.

Log Return = 0.0026 + 0.0002 10 Year Bond Yield – 0.00108 Net National Income -1.37 FDI –
0.0003 GDP – 0.00198 Inflation
In order for the forecast of a model to be robust at least three out of the Mean Absolute Error,
Mean Absolute Percentage Error, Root Mean Square Error and Theil Inequality Coefficient should
be at least less than 1. The forecasting is also proved to be robust as 3 out of the 4 parameters of
Mean Absolute Error, Mean Absolute Percentage Error, Root Mean Squared Error and Theil
Inequality Coefficient are below 1. Additionally, the bias proportion is nil indicating that there is
no behavioral biasness in the said markets. From the above analysis it can be safely said that the
variables used for the model cannot successfully help in predicting the volatility in the markets.

Conclusion

Comparing the results of the emerged countries such as US, Japan, UK, France and Germany with
those of emerging like India, Russia, China, South Africa and Brazil it can be seen that a specific
set of variables- GDP growth rate, 10 Year G-Sec, Inflation Rate, Net National Income and foreign
direct investment (net), won’t help in predicting the volatility of the indices of these different
sectors as they are effected by different external and internal factors. Thus, one model wouldn’t fit
for both emerged and emerging countries. It can also be inferred that it is hard to tell from the long
time series just how long before a crisis that the market volatility starts. One of the most visible
indicators of the crisis that captured the attention of the general public was the extreme high level
of stock return volatility. This uncertainty prompted much speculation and discussion about the
likely real economic consequences of the credit crisis. This paper has shown that the spike in stoke
volatility occurred in many countries. Volatility was highest among stocks in the financial sector
but it was high market-wide.
References:

1. Kirchler, M., & Huber, J. (2007). Fat tails and volatility clustering in experimental asset
markets. Journal of Economic Dynamics and Control, 31(6), 1844-1874
(9) (PDF)
2. Ahmed, F., & Ali, R. (2017). Modelling Stock Indexes Volatility of Emerging Markets
Measuring Stock Indexes Volatility of Emerging Markets, (December).
3. Akgiray, V. (1989). Conditional heteroscedasticity in time series of stock returns:
Evidence and forecasts. Journal of business, 55-80
4. Brooks, C. (1998). Predicting stock index volatility: can market volume help?. Journal
of Forecasting, 17(1), 59-80
5. French, K. R., Schwert, G. W., & Stambaugh, R. F. (1987). Expected stock returns and
volatility. Journal of financial Economics, 19(1), 3-29
6. Busse, J. A. (1999). Volatility timing in mutual funds: Evidence from daily returns. The
Review of Financial Studies, 12(5), 1009-1041
7. Brandt, M. W., & Jones, C. S. (2006). Volatility forecasting with range-based EGARCH
models. Journal of Business & Economic Statistics, 24(4), 470-486
8. Mandelfrot, B.B . 1963. The Variation of Certain Speculative Prices, Journal of Business
36, 394-416
9. Fama, E. F. 1963. Mandelbrot and the Stable Paretian Distribution, Journal of Business 36,
420-429.
10. Fama, E. F. 1965. The Behavior of Stock Market Prices, Journal of Business 38, 34-105
11. Cohary, A. and Rad, A. T. 1994. Statistical Properties of Daily Returns: Evidence from
European Stock Markets. Journal of Business Finance and Accounting. 21, 271-282
12. Schwert, G. W., 1989. Why Does Stock Market Volatility Change Over Time? Journal of
Finance. 44, 1115-1154
13. Black (1976). Studies in Stock Price Volatility Changes, Proceedings of the 1976 Business
Meeting of the Business and Economics Statistics Section, American Statistical
Association, 177-181
14. Koutmos, G., Negakis, C and Theodossiou, P. 1993. Stochastic Behaviour of the Athens
Stock Exchange. Applied Financial Economics. 3, 119-126.
15. Andersen, T. G., Bollerslev, T., Diebold F. X. and Ebens, H. 2000. The Distribution of
Stock Return Volatility. National Bureau of Economic Research NBER Working papers,
7933,
16. Bekaert, G. and C. R. Harvey, 1997.“Emerging Equity Market Volatility,” Journal of
Financial Economics, 43, 29-77
17. Lo, M. S. 2000. Generalized Autoregressive Conditional Heteroscedastic Time Series
Models. Department of Statistics and Actuarial Science, Simon Fraser University, British
Columbia, Canada
18. Tully, E., & Lucey, B. M. (2007). A power GARCH examination of the gold market.
Research in International Business and Finance, 21(2), 316-325
19. Ding, Z., Granger, C. W., & Engle, R. F. (1993). A long memory property of stock market
returns and a new model. Journal of empirical finance, 1(1), 83-106
20. Engle, R. (2001). GARCH 101: The use of ARCH/GARCH models in applied
econometrics. The Journal of Economic Perspectives, 15(4), 157-168.
21. Bollerslev, T. (1986). Generalized autoregressive conditional heteroskedasticity. Journal
of econometrics, 31(3), 307-327
22. Di Giovanni, J., & Levchenko, A.A.(2009). Trade Openness and Volatility.Review of
Economics and Statistics, 91(3), 558-585. https://doi.org/10.1162/rest.91.3.558
23. Di Giovanni, J., &Levchenko, A.A. (2010).The Risk Content of Exports: A Portfolio View
of International Trade. NBER Working Papers, National Bureau of Economic Research,
(16005).
24. Rodrik, D. (1998). Why Do Open Economies Have Bigger Governments?.Journal of
Political Economy, 106(5), 997-1032. https://doi.org/10.1086/250038
25. Dawe, D. (1996). A New Look at the Effects of Export Instability on Investment and
Growth. World Development, 24(12), 1905-1914.
26. Dehn, J. (2000). Commodity Price Uncertainty in Developing Countries.Policy
Research Working Paper, 2426.https://doi.org/10.1596/1813-9450-2426
27. Guillaumont, P., Guillaumont-Jeanneney, S., &Brun, J.F. (1999).How Instability
Lowers African Growth. Journal of African Economies, 8(1), 87-107.
28. Hnatkovska, V., &Loayza, N. (2005).Volatility and Growth.in J. Azeinman et B. Pinto
(eds.) Managing Economic volatility and Crises,Cambridge, Mass: Cambridge University
Press.
29. Plihon, D. (2008). Lutter contre l’instabilité financière : pour un aggiornamento de la
théorie et de la régulation financières. Financial Economics Review, 7(1), 433-437.
30. Azeinman, J., & Pinto, B. (2005).Managing Volatility and Crises: A Practitioner's
Guide Overview, Cambridge: Cambridge University Press
31. Ventura, J. (2007). Macroeconomic Volatility and Welfare in Developing Countries:
An Introduction. World Bank Economic Review, 21(3), 343-357.
32. Koren, M., &Tenreyro, S. (2007).Volatility and Development.Quarterly Journal of
Economics, 122(1), 243-287.
33. Krishna, P.,&Levchenko, A. (2013).Comparative Advantage, Complexity, And
Volatility.
34. Loayza, N.V., &Raddatz, C. (2007).The Structural Determinants of External
Vulnerability.World Bank Economic Review, 21(3), 359-387.
https://doi.org/10.1093/wber/lhm018
35. Tapia, H. (2012). Economic Policies, Volatility and Development.Thèse, Columbia:
Columbia University
36. Loayza, N.V., Rancière, R., Servén, L., & Ventura, J. (2007).Macroeconomic Volatility
and Welfare in Developing Countries: An Introduction. World Bank Economic
Review, 21(3), 343-357 .
37. Rancière, R., Tornell, A., &Westermann, F. (2008).Systemic Crises and
Growth.Quarterly Journal of Economics, 123(1), 359-406.
38. Combes, J.L., &Guillaumont, P. (2002).Commodity Price Volatility, Vulnerability
and Development.Development Policy Review, 20(1), 25-39.
39. Guillaumont, P., Guillaumont-Jeanneney, S., &Brun, J.F. (1999).How Instability
Lowers African Growth. Journal of African Economies, 8(1), 87-107.
40. Guillaumont, P. (2007). Economic Vulnerability, Persistent Challenge to African
Development. Revue Africaine du Développement, 19(1), 123-162.
41. Guillaumont, P. (2009). An Economic Vulnerability Index: Its Design and Use
for International Development Policy. Oxford Development Studies, 37(3), 193-228.
42. Guillaumont, P. (2010). Assessing the Economic Vulnerability of Small Island
Developing States and the Least Developed Countries.Journal of Development Studies,
46(5), 828-854.
43. Raddatz C. (2007). Are External Shocks Responsible for the Instability of Output in
Low-Income Countries?.Journal of Development Economics, 84(1), 155-187.

44. Engle R. Autoregressive conditional heteroscedasticity with estimates of the variance of

United Kingdom inflation. Econometrica: Journal of the Econometric Society.
1982;50:987–1007.

45. Engle R. Dynamic conditional correlation: A simple class of multivariate generalized

autoregressive conditional heteroskedasticity models. Journal of Business & Economic
Statistics. 2002;20(3):339–50.

46. Bollerslev T. Generalized autoregressive conditional heteroskedasticity. Journal of

Econometrics. 1986;31(3):307–27.

47. Barndorff-Nielsen OE. Econometric analysis of realized volatility and its use in estimating
stochastic volatility models. Journal of the Royal Statistical Society: Series B (Statistical
Methodology). 2002;64(2):253–80.

48. Fleming J, Ostdiek B, Whaley RE. Predicting stock market volatility: A new measure.
Journal of Futures Markets. 1995;15(3):265–302.

49. Bansal R, Gallant R, Tauchen G. Rational pessimism, rational exuberance, and markets for
macro risks. Manuscript, Fuqua School of Business, Duke University, Durham NC. 2004.

50. Bansal R, Yaron A. Risks for the long run: A potential resolution of asset pricing puzzles.
The Journal of Finance. 2004;59(4):1481–509.

51.Tauchen G. Stochastic volatility in general equilibrium. The Quarterly Journal of Finance.

2011;1(04):707–31.
52. Bansal R, Kiku D, Shaliastovich I, Yaron A. Volatility, the macroeconomy, and asset
prices. The Journal of Finance. 2014;69(6):2471–511.

53. Britten-Jones M, Neuberger A. Option prices, implied price processes, and stochastic
volatility. The Journal of Finance. 2000;55(2):839–66.

54. Jiang GJ, Tian YS. The model-free implied volatility and its information content. The
Review of Financial Studies. 2005;18(4):1305–42.

55. Martin I. What is the Expected Return on the Market? The Quarterly Journal of Economics.
2017;132(1):367–433.

56. Martin I, Wagner C. What is the Expected Return on a Stock? The Journal of Finance.
2018;forthcoming.

57. L. Gang and L. Yong, “Forecasting copper futures volatility under model uncertainty,
Resources Policy,” The International Journal of Minerals Policy and Economics, vol. 46,
pp. 167–176, 2015.

58. S. R. Bentes, “Forecasting volatility in gold returns under the GARCH, IGARCH and
FIGARCH frameworks: New evidence,” Physica A: Statistical Mechanics and its
Applications, vol. 438, pp. 355–364, 2015.

59. A. Joukar and I. Nahmens, “Volatility forecast of construction cost index using general
autoregressive conditional heteroskedastic method,” Journal of Construction Engineering
and Management, vol. 142, no. 1, Article ID 04015051, 2015.

60. D. S. Kambouroudis and D. G. McMillan, “Does VIX or volume improve GARCH

volatility forecasts?” Applied Economics, vol. 48, no. 13, pp. 1210–1228, 2015.

61. W. Kristjanpoller and M. C. Minutolo, “Gold price volatility: a forecasting approach using
the artificial neural network-GARCH model,” Expert Systems with Applications, vol. 42,
no. 20, pp. 7245–7251, 2015.
62. E. Abounoori, Z. Elmi, and Y. Nademi, “Forecasting Tehran stock exchange volatility;
Markov switching GARCH approach,” Physica A: Statistical Mechanics and its
Applications, vol. 445, pp. 264–282, 2016.

63. S. J. Byun, “The usefulness of cross-sectional dispersion for forecasting aggregate stock
price volatility,” Journal of Empirical Finance, vol. 36, pp. 162–180, 2016.

64. T. Bollerslev, A. J. Patton, and R. Quaedvlieg, “Exploiting the errors: A simple approach
for improved volatility forecasting,” Journal of Econometrics, vol. 192, no. 1, pp. 1–18,
2016.

65. S. Al Wadi, A. Hamarsheh, and H. Alwadi, “Maximum overlapping discrete wavelet

transform in forecasting banking sector,” Applied Mathematical Sciences, vol. 7, no. 77-
80, pp. 3995–4002, 2013

66. A. M. H. Al-Khazaleh, S. Al Wadi, and F. Ababneh, “Wavelet transform asymmetric

winsorized mean in detecting outlier values,” Far East Journal of Mathematical Sciences,
vol. 96, no. 3, pp. 339–351, 2015.

68. A. Puckovs and A. Matvejevs, “Wavelet Transform Modulus Maxima Approach for World
Stock Index Multifractal Analysis,” Information Technology and Management Science,
vol. 15, no. 1, 2012.

69. A. Abbasi, M. A. Aghaei, and M. M. Zadehfard, “Case study of price index of Tehran
Stock Exchange,” ournal Forecasting Stock Market Using Wavelet Transforms and
Neural Networks and ARIMA, vol. 5, no. 3, pp. 31–40, 2015.

70. Markowitz, H. (1952). Portfolio selection. The. Journal of Finance, 7, 77–91.

doi:10.1111/j.1540-6261.1952.tb01525.x

71. Mandimika, N. Z., & Chinzara, Z. (2012). Risk- returns trade-off and behaviour of
volatility on the South African stock market: Evidence from both aggregate and
disaggregate data. South African Journal of Economics, 80, 345–366. doi:10.1111/j.1813-
6982.2012.01328.x
72. Merton, R. C. (1973). An intertemporal asset pricing model. Econometrica, 41, 867–887.

73. Brunnermeier, M. and Y. Sannikov (2014). A macroeconomic model with a financial

sector. American Economic Review 104, 379–421.

74. Brunnermeier, M. and Y. Sannikov (2014). A macroeconomic model with a financial

sector. American Economic Review 104, 379–421.

75. Danielsson, J., H. S. Shin, and J.-P. Zigrand (2012). Procyclical leverage and endogenous
risk. Working Paper, Princeton University

76. Simsek, A. (2013). Belief disagreements and collateral constraints. Econometrica 81 (1),
1–53

77. Fostel, A. and J. Geanakoplos (2014). Endogenous collateral constraints and the leverage
cycle. Annual Review of Economics 6, 771–799

78. Greenwood, R. and S. G. Hanson (2013). Issuer quality and corporate bond returns. Review
of Financial Studies 26, 1483–1525.

79. Schularick, M. and A. Taylor (2012). Credit booms gone bust: Monetary policy, leverage
cycles, and financial crises, 1870–2008. American Economic Review 102, 1029–1061.

80. Baron, M. and W. Xiong (2016). Credit expansion and neglected crash risk. Quarterly
Journal of Economics Forthcoming

81. Baker, S. R., N. Bloom, and S. J. Davis (2016). Measuring economic policy uncertainty.
Quarterly Journal of Economics 131, 1593–1636

82. Gulen, H. and M. Ion (2016). Policy uncertainty and corporate investment. Review of
Financial Studies 29, 523–564

83. Engle, R., E. Ghysels, and B. Sohn (2013). Stock market volatility and macroeconomic
fundamentals. Review of Economics and Statistics, 776–797
84. Dixit, A. K. and R. S. Pindyck (1994). Investment under Uncertainty. Princeton University
Press

85. Kumar, S.S.S. "Financial derivatives", 2nd Pr., PHI Learning Private Ltd., New Delhi,
2008, PP.1-27, 57-306.

86. Thenmozhi, M and Abhijeeth Chandra (2013). ‘India volatility index (India VIX) and risk
management in the Indian stock market’, NSE working papers.

87. Shenbagaraman (2003), ‘Do futures and options trading increase stock market volatility?’,
NSE working papers.

88. Nath, GC (2003), ‘Behavior of stock market volatility after derivatives’, NSE working
papers

89. Vipul (2007), ‘Impact of the introduction derivatives on underlying volatility: evidences
from India’, applied financial economics, Vol. 16

90. Dhanaiah G Reddy and Prasad (2012), ‘India VIX: examining the negative and asymmetric
volatility index-market return relationship’, Indian journal of finance Vol. 6, 5, Pp 4 – 10

91. Ding, Z., C. Granger, and R. Engle (1993). A long memory property of stock market returns
and a new model. Journal of Empirical Finance 1, 83–106

92. Baillie, R. (1996). Long memory processes and fractional integration in econometrics.
Journal of Econometrics 73 (1), 5–59.

93. Andersen, T. and T. Bollerslev (1997a). Heterogeneous information arrivals and return
volatility dynamics: Uncovering the long-run in high frequency returns. Journal of
Finance 52, 975–1005.

94. Comte, F. and E. Renault (1998). Long memory in continuous-time stochastic volatility
models. Mathematical Finance 8, 291–323

95. Comte, F. and E. Renault (1998). Long memory in continuous-time stochastic volatility
models. Mathematical Finance 8, 291–323
96. Carr, P. and L. Wu (2009). Variance risk premia. Review of Financial Studies 18, 1311–
1341

97. Bollerslev, T., M. Gibson, and H. Zhou (2011). Dynamic estimation of volatility risk
premia and investor risk aversion from option-implied and realized volatilities. Journal of
Econometrics 160, 235–245

98. Christensen, B. J. and M. O. Nielsen (2006). Asymptotic normality of narrow-band least

squares in the stationary fractional cointegration model and volatility forecasting. Journal
of Econometrics 133, 343–371.

99. Bandi, F. and B. Perron (2006). Long memory and the relation between implied and
realized volatility. Journal of Financial Econometrics 4, 636–670.

100. Black, F. (1976). Studies in stock price volatility changes. Proceedings from the American
Statistical Association, Business and Economics Statistics Section, 177-181

101. Nelson, D. (1991). Conditional heteroskedasticity in asset returns: A new approach.

Econometrica 59, 347–370.

102. Bollerslev, T., J. Litvinova, and G. Tauchen (2006). Leverage and volatility feedback
effects in high-frequency data. Journal of Financial Econometrics 4, 353–384

103. French, K., G. Schwert, and R. Stambaugh (1987). Expected stock returns and volatility.
Journal of Financial Economics 19, 3–29

104. Glosten, L., R. Jagannathan, and D. Runkle (1993). On the relation between the expected
value and the volatility of the nominal excess return on stocks. Journal of Finance 48,
1779–1801.

105. Campbell, J. and L. Hentschell (1992). No news is good news: An asymmetric model of
changing volatility in stock returns. Journal of Financial Economics 31, 281–318

106. Agarwal ,Reena.,Carla Inclam and Ricardo Leal.,1995,Volatility in Emerging Stock

Markets. Gorgetown University and Rio-de-Jenerio.
107. Agarwal,Gaurav.,A.K.Srivastava and Ankita Srivastava.,2010,A Study of Exchange
Rates Movement and Stock Market Volatility.International Journal of Business and
Management,Vol-5,No-12,December. International Journal of Scientific and Research
Publications, Volume 3, Issue 10, October 2013 14 ISSN 2250-3153 www.ijsrp.org

108. Amatyakul, P., 2010. The Relationship Between Trading Volume and Jump. Processes
in Financial Markets. Duke Journal of Economics XXII.

109. Asai,Manabu and Agelo Unite.,2007,The relationship between stock return volatility
and trading volume:The case of the Philippines,Soka University,Manila and De La Salle
University,Manila.

110. Assogbavi,Tov.,1995,Short Interest and the asymmetry of the price volume relationship
in the Canadian stock market.Journal of Banking and Finance,19.

111. Assogbavi,Tov,Schell,Jennifer and Fagnisse Simeon.,2007,Equity-price-volume

relationship on the Russian Stock Exchange.International Business and Economics
Research Journal 6.

112. Avramov,Doron and Tarun Chordia and Amit Goyal,2006,The Impact of Trades on
Daily Volatility.The Review of Financial Studies.Vol-19,No-4,1241-1277.

113. Batra,Amita.,2004,Stock return volatility patterns in India.ICRIER,WP-124,March.

[9]Bernanke,Ben and Mark Gertler.,1999,Monetary Policy and Asset Price
Volatility.Economic Review,Q4,18- 51

114. Bhaumik,S.,M.Karanasos and A.Kartsaklas,2008,Derivatives Trading and the Volume

–Volatility Link in the Indian Stock Market.William Davidson,Institute Working Paper
No-935,April.

115. Bloomfield, Robert, Maureen O‘Hara, and Gideon Saar., 2009, How noise trading
affects markets: An experimental analysis? Review of Financial Studies 22, 2275–2302.

117. Brailsford,Timothy J.,1994,The Empirical relationship between trading volume ,returns

and volatility. Research Paper 94-01,December.
118. Campbell, J. Y., S. J. Grossman, and J. Wang., 1993, Trading Volume and Serial
Correlation in Stock Returns. The Quarterly Journal of Economics 108, 905-39

119. Campbell, John Y; Lettau, Martin; Malkiel, Burton and Xu, Yexaio.,2001, "Have
Individual Stocks Become More Volatile? An Empirical Exploration of Idiosyncratic
Risk", Journal of Finance, February 56 (1), pp. 1-43.

120. Caporale,Guglielmo Maria and Nicola Spaguolo.,2011,Stock market and Economic

growth:Evidence from Tree CEECs.Economics and Finance WP Series 11-16,Brunnel
University,London,September.

121. Cecchetti, S., H. Genberg, J. Lipsky, and S. Wadhwan, 2000. Asset prices and central
bank policy. International Center for Monetary And Banking Studies, Brookings 388
CHENG-SI ZHANG, DA-YIN ZHANG, AND JEFFERY BREECE Institution Press,
London.

122. Choi,Ki-Hong,Zhu-Hua Jiang,Sang Hoon Kang,Seong-Min Yoon.,2012,Relationship

between trading volume and asymmetric volatility in the Korean stock market.Modern
Economy,3,584-589.

123. Choudhry, T., 2003,Stock Market Volatility and the U.S. Consumer Expenditure. In:
Journal of Macroeconomics 25. 367–385. International Journal of Scientific and
Research Publications, Volume 3, Issue 10, October 2013 15 ISSN 2250-3153
www.ijsrp.org

124. Christiano, L., C. Ilut, R. Motto, and M. Rostagno, 2008. Monetary policy and stock
market boom-bust cycles. European Central BankWorking Paper Series with number
955.

125. Clark,Peter.,Natalia Tamirisa and Shang-Jin Wei.,2004,Exchange Rate Volatility and

Trade Flows-Some New Evidence.IMF.May.

126. Corredi,Valentina,WalterDistaso and Antonio Male,2010,Macroeconomic Determinants

of stock market volatility and volatility risk premium-London School of Economics.

127. Dellas,Harris and Martin K.Hess.,2002,Financial Development and Stock Returns :A

cross country analysis.CEPR,DP-3681.
128. Eichengreen,Barry and Hui Tong.,2003,Stock Market Volatility and Monetary Policy
:What the historical record shows.University of California,August.Rescue of Bank of
Australia‘s Annual Research Conference,Sydney.

129. Gilchrist,S., and Massashi Sainto.,2006,Expectations,Asset Prices and Monetary

policy:The role of Learning.NBER,WP-12442.

130. Giot, P., S. Laurent, and M. Petitjean, 2010. Trading activity, realized volatility and
jumps. Journal of Empirical Finance 17(1), 168-175.

131. Gospodinov,Nikolay and Ibrahim Jamali,2011,The Response of Stock Market Volatility

to Future based Measures of Monetary Policy Shocks,Concordia University,Montreal
and American University of Beirut.

132. Grobys,Klaus.,2010,Have volatility spillover effects of co-integrated European stock

markets increased overtime?The Review of Finance and Banking ,Vol-02,Issue-2, 083-
94.

133. Guhan,P.,J.K.Mantri,J.K.Parida and P.K.Sanyal.,2010,Volatility study of Indian stock

market during its post derivative period. Sambalpur University, Odisha.

134. Guo, Hui.,2002, "Stock Market Returns, Volatility, and Future Output", Review,
Federal Reserve Bank of St. Louis, September/October, pp. 75-85

135. Joshi,Prashant.,2011,Return and Volatility Spillovers Among Asian Stock Markets,I-

Shou University, Taiwan,August 24,SAGEopen.

136. Kaniel,Ron,Gideon Saar and Sheridan Titman.,2008,Individual Investor Trading and

Stock Returns.The Journal of Finance,Volume-63,Issue-1,273-310,February

137. Karpoff, J. M., 1987. The Relation between Price Changes and Trading Volume: A
Survey. Journal of Financial and Quantitative Analysis 22, 109-126.

138. Karanasos, M., and A. Kartsaklas.,2004, The Stock Volatility-Volume Relationship in

Canada and France. IASME Transactions, 4, 659-664. International Journal of Scientific
and Research Publications, Volume 3, Issue 10, October 2013 16 ISSN 2250-3153
www.ijsrp.org
139. Karanasos,M. and Catherine Kyrtsou.,2011,Analysing the Link between Stock
Volatility and Volume by a Mackey-Glass GARCH-type Model:The Case of
Korea.Quantitative and Qualitative Analysis in Social Science.Volume-5,Issue -1,49-69

140. Khalid,A.M. and Gulasekaran Rajanguru.,2010,The Impact of Political Events on

Financial Market Volatility:Evidence Using a Markov Switching Process.Bond
University.

141. Kim,Kenneth A.,2001,Price limits and stock market volatility.Economics Letters 71,
131-136.

142. Kim, J., Kartsaklas, A. and Karanasos, M.,2005,The volume-volatility relationship and
the opening of the Korean stock market to foreign investors after the financial turmoil in
1997, Asia-Pacific Financial Markets 12 (3) : 245- 271

143. Kose,Ayhan M.,M.Terrones and E.Prasad,2003,Volatility and Comovement in

globalised world economy:An empirical exploration,IMF,WP-03/246.

144. Kumar ,Brajesh and Priyanka Sing,2000,The Dynamic relationship between stock
returns,trading volume and volatility:Evidence from Indian stock
market.IIM,Ahmedabad.

145. Kyrtsou, C., and M. Terraza.,2002, Stochastic Chaos or ARCH Effects in Stock Series?
A Comparative Study. International Review of Financial Analysis, 11, 407-431.

146. Kyrtsou, C., and M. Terraza.,2003, Is it Possible to Study Chaotic and ARCH Behavior
Jointly? Application of a Noisy Mackey-Glass Equation with Heteroscedastic Errors to
the Paris StockExchange Return Series. Computational Economics, 21, 257-276.

147. Lamoureux, C. G., andW. D. Lastrapes.,1990, Heteroskedasticity in Stock Return Data:

Volume versus GARCH Effects. Journal of Finance, 45, 221-229.

148. Lamoureux, C.G. and W.D. Lastrapes.,1994, ―Endogenous trading volume and
momentum instock-return volatility‖, Journal of Business and Economic Statistics, 12,
253-260
149. Lee,Hahn Shik.,2001,International Transmission of stock market movements:A Vavelet
Analysis on MENA Stock Markets.Sogang University,Seoul,Korea .The draft presented
at ERF‘s 8th Annual Conference in Manama Bahrain.

150. Lee,Hahn Shik.,2010,Price and Volatility Spillovers in stock matkets:A Wavelet

Analysis. Sogang University,Seoul ,Korea.

151. Malkiel,B.G.,Yexiao Xu.,1999,The Structure of Stock market volatility.Princeton

University.

152. Mei,Jianping and LiminGuo,2002,Political uncertainty Financial crisis and Market

volatility, NewYork University.

153. Mele,Antonio.,2007,Asymmetric Stock market volatility and the cyclical behavior of

expected returns.Journal of Financial Economics ,86,446-478. International Journal of
Scientific and Research Publications, Volume 3, Issue 10, October 2013 17 ISSN 2250-
3153

154. Mishra,Alok Kumar.,Niranjan Swine and D.K.Malhotra., 2007,Volatility spillover

between stock and foreign exchange markets:Indian experience.International Journal of
Business.,12(3).

155. Mubarik,Fauzia and Athiya Y.Javid.,2009,Relationship between stock return trading

volume and volatility:Evidence from Pakistan stock market.Asia Pacific Journal of
Finance and Banking Research ,Vol- 3,No-3,

156. Raunig,Burkhard and Johann Scharler,2010,Stock Market Volatility and the Business
Cycle.Monetary Policy and the Economy.Q2,53-63

157. Romer, C., 1990, The Great Crash and the Onset of the Great Depression. In: The
Quarterly Journal of Economics 105. 597–624.

158. Samanta,G.P.,2010,Stock market return,volatility and furure output growth-Some

observations relating to Indian Economy.Assistant Advisor,NSE.

159. Schwert, G. W., 1989, ‗‗Why Does Stock Market Volatility Change Over Time?‘‘
Journal of Finance, 44,1115–1153.
160. Schwert, G. William.,1989b,Business Cycles, Financial Crises and Stock
Volatility,.NBER Working Paper no. 2957 (May).

161. Voth,Hans-Joachim,2002,Why was stock market volatility so high during the great
depression? Evidence from 10 countries during the interwar period. MIT,WP-02/09

162. Wang,Tianyi and Zhuo Huang.,2012,The Relationship between volatility and trading
volume in the Chinese stock market:A volatility decomposition perspective.Annals of
Economics and Finance,13-1,211-236,

163. Yalcin,Yeliz and Eray M.Yucel,2006,The Day-of-the-Weak effect on Stock market

Volatility and Return:Evidence from Emerging Markets.Czech Journal of Economics
and Finance,56,258-279

164. Zhang , Cheng-si,Da-yin Zhang and Jeffery Breece,2011,Financial Crisis,Monetary

Policy, and Stock Market Volatility in China.Annals of Economics and Finance 12-
2,371-

165. Inci Ötker-Robe and Anca Maria Podpiera, 2008, The Social Impact of Financial Crises:
Evidence from the Global Financial Crisis, https://doi.org/10.1596/1813-9450-6703

166. Mariusz Prochniak, Katarzyna Wasiak, 2017, The impact of the financial system on
economic growth in the context of the global crisis: empirical evidence for the EU and
OECD countries, Volume 44, Issue 2, pp 295–337

167. Christian Leuz and Peter Wysocki, 2008, Economic Consequences of Financial
Reporting and Disclosure Regulation: A Review and Suggestions for Future Research,
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1105398

168. Sergiy Ladokhin, 2009, Volatility modeling in financial markets,

https://beta.vu.nl/nl/Images/stageverslag-ladokhin_tcm235-106483.pdf

169. Vladimir Piterbarg, 2003, A Stochastic Volatility Forward Libor Model with a Term
Structure of Volatility Smiles, https://ssrn.com/abstract=472061

170. Peter Verhoevena, Michael McAleerb, Volume 64, Issues 3–4, 11 February 2004, Pages
351-361
171. Robert F.Engle, Andrew J.Patton, 2007, 2 - What good is a volatility model?,
Forecasting Volatility in the Financial Markets (Third Edition), Pages 47-63.

172. Robertson, D., and J. Symons. 2000. Factor residuals in SUR regressions: Estimating
panels allowing for cross sectional correlation. Unpublished manuscript.

173. Pesaran, M. H. 2004. General diagnostic tests for cross section dependence in panels.
University of Cambridge, Faculty of Economics, Cambridge Working Papers in
Economics No. 0435.

174. Anselin, L. 2001. Spatial Econometrics. In A Companion to Theoretical Econometrics,

ed. B. H. Baltagi, 310–330. Oxford: Blackwell Scientific Publications.

175. Baltagi, B. H. 2005. Econometric Analysis of Panel Data. 3rd ed. New York: Wiley.

176. Driscoll, J., and A. C. Kraay. 1998. Consistent covariance matrix estimation with
spatially dependent data. Review of Economics and Statistics 80: 549–560.

177. Robertson, D., and J. Symons. 2000. Factor residuals in SUR regressions: Estimating
panels allowing for cross sectional correlation. Unpublished manuscript.

178. Coakley, J., A. Fuertes, and R. Smith. 2002. A principal components approach to cross-
section dependence in panels. Unpublished manuscript.

179. Phillips, P., and D. Sul. 2003. Dynamic panel estimation and homogeneity testing under
cross section dependence. Econometrics Journal 6: 217–259.

180. Sarafidis, V., and D. Robertson. 2006. On the impact of cross section dependence in
short dynamic panel estimation. http://www.econ.cam.ac.uk/faculty/robertson/csd.pdf

181. Anderson, T. W., and C. Hsiao. 1981. Estimation of dynamic models with error
components. Journal of the American Statistical Association 76: 598–606.

182. Arellano, M., and S. Bond. 1991. Some tests of specification for panel data: Monte
Carlo evidence and an application to employment equations. Review of Economic
Studies 58: 277–297.

183. Blundell, R., and S. Bond. 1998. Initial conditions and moment restrictions in dynamic
panel data models. Journal of Econometrics 87: 115–143.
184. Ansari, M.S. and Ranga, M., 2010. India’s Foreign Direct Investment: Current status,
issues and policy recommendations. UTMS Journal of Economics, 1 (2), pp.1-16.

185. Hooda, S., 2011. Study of FDI and Indian economy, [Online] pp. 114-115. Available at:
http://www.nitkkr.ac.in/Sapna_Hooda_Thesis_A_Study_of_FDI_and_Indian_Econo
my.pdf

186. Brezina, B., 2012, Understanding the Gross Domestic Product and the Gross National
Product, New York, The Rosen Publishing Group, Inc

187. French, K. R. 1980. “Stock Returns and The Weekend Effect.” Journal of Financial
Economics 8:55-69.

188. Campbell, J. Y., and L. Hentschel. (1992). “No News is Good News: An Asymmetric
Model of Changing Volatility in Stock Returns”, Journal of Financial Economics, 31:
281-318.

189. Glosten, L. R., R. Jagannathan, and D. E. Runkle. (1993). “On the Relation between the
Expected Value and the Volatility of the Nominal Excess Returns on Stocks.” Journal of
Finance 48:1779-1801.

190. Nelson, D. B. 1991. “Conditional Heteroskedasticity in Asset Returns: A New

Approach.” Econometrica, 59: 347-370.

191. Baillie, R. T., and R. P. DeGennaro. (1990), “Stock Returns and Volatility.” Journal of
Financial and Quantitative Analysis , 25: 203-214.

192. Chan, K. C., G. A. Karolyi, and R. M. Stulz. (1992). “Global Financial Markets and the
Risk Premium on U.S. Equity.” Journal of Financial Economics, 32: 137-167.

193. Corhay, A., and A. T. Rad. (1994). “Statistical Properties of Daily Returns: Evidence
from European Stock Markets.” Journal of Business Finance and Accounting 21: 271-
282.

194. French, K. R. 1980. “Stock Returns and The Weekend Effect.” Journal of Financial
Economics 8:55-69.
195. Campbell, J. Y., and L. Hentschel. (1992). “No News is Good News: An Asymmetric
Model of Changing Volatility in Stock Returns”, Journal of Financial Economics, 31:
281-318.

196. Glosten, L. R., R. Jagannathan, and D. E. Runkle. (1993). “On the Relation between the
Expected Value and the Volatility of the Nominal Excess Returns on Stocks.” Journal of
Finance 48:1779-1801.

197. Nelson, D. B. 1991. “Conditional Heteroskedasticity in Asset Returns: A New

Approach.” Econometrica, 59: 347-370.388