Investigating the Asymmetry in Volatility for the Iranian Stock Market

Abstract

This paper investigates the asymmetry in volatility of returns for the Iranian stock market using the daily closing values of the Tehran exchange price index (TEPIX) covering the period from March 25, 2001 to July 25, 2012, with a total of 2743 observations. To this end, two sets of tests have been employed: the first set is based on the residuals derived from a symmetric GARCH (1,1) model. The second set is based on the asymmetric GARCH models, including EGARCH (1,1), GJR-GARCH(1,1), and APARCH(1,1) models. To capture the stylized fact that the returns series are fat-tailed distributed, in addition to classic Gaussian assumption, the innovations are also assumed to have t-student distribution and GED (Generalized Error Distribution). The results indicate that there is no evidence of the leverage effects in the Iranian stock market, meaning that negative and positive shocks of the same magnitude have the same impacts on the future volatility level. This result is in contrast with the results of most empirical studies, where an asymmetry in volatility of stock returns has been found. This seems to be the result of the governmental or quasi-governmental nature of many companies listed on the Tehran Stock Exchange.