An Analysis of Emerging Markets Returns Volatility: Case of Tehran Stock Exchange

Abstract

This paper analyses the volatility behaviour of Tehran Stock Exchange returns. Since volatility is an important factor in portfolio selection, asset pricing, and risk management, the main purpose of our study is to model and forecast the returns volatility of the Tehran Stock Exchange (TSE). The main contribution of this study as the very first attempt is to enhance the knowledge on the behaviour of volatility of TSE. Using primary index data of TSE for 2003-2008, we investigate the appropriateness of several potential models of autoregressive (AR), moving averages (MA), and autoregressive moving averages (ARMA). The ARMA (2, 1) has been chosen as the best process for modelling the conditional mean. We used EGARCH and TGARCH models to capture asymmetries in terms of negative and positive shocks and the leverage effect. The ARMA (2, 1)-TGARCH (1, 1) model was the best process to fit the data. We find no evidence of the presence of the leverage in the news; nor does the bad news have a larger effect on the volatility of returns than the good news. Of the three forecast performance measures, the TGARCH (1, 1) was the best model to forecast the volatility.