Abstract
This article proposes an extension to the CGARCH model in order to capture the characteristics of short-run and long-run asymmetry and persistence, and examine their effects in modeling and forecasting the conditional volatility of the stock markets from the region of Latin America during the period from 2 January 1992 to 31 December 2014. In the sample analysis, the estimation results of the CGARCH-class model family reveal the presence of short-run and long-run significant asymmetric effects and long-run persistency in the structure of stock price return volatility. The empirical results also show that the use of symmetric and asymmetric loss functions and the statistical test of Hansen (2005) are sound alternatives for evaluating the predictive ability of the asymmetric CGARCH models. In addition, the inclusion of long-run asymmetry and long-run persistency in the variance equation improves significantly the out of sample volatility forecasts for emerging stock markets of Argentina and Mexico.
Highlights
The new millennium has witnessed the transformation and fast growth of the equity markets in the emerging economies
The CGARCH model of Engle and Lee (1999) was extended in order to investigate whether the characteristics of long-term asymmetry and persistence have effects in the prediction of conditional volatility of the yields of the equity markets of the Latin American region
The empirical evidence shows that in the volatility of the stock yields there are vestiges of effects of longterm asymmetry in the cases of Chile, Colombia, Mexico, and Peru; this means that the negative shocks will have a greater impact in the component of short-term volatility, and in their long-term tendency
Summary
The new millennium has witnessed the transformation and fast growth of the equity markets in the emerging economies. The contagion effect of stock market crises of mature markets to emerging equity markets is a key factor that triggers a higher volatility and negative effects on these markets (Tasdemir & Yalama, 2014) The duration of this type of events does generate negative panic information among investors in order to pressure investors to liquidate their portfolios, and creates abrupt changes in the structure of volatility in the short and long terms, which reduces the capacity of the GARCH, EGARCH and GARCH-GJR models to collect the asymmetry and the degree of persistence in the long-term. The empirical results within the sample reveal that in the yields of the equity markets of the Latin American region, asymmetry and persistence effects can be observed in the volatility structure, in Chile, Colombia, Peru, and Mexico These findings support the claims that negative shocks such as financial crises and stock market crashes increase the short and long-term volatility. We present an alternative approach for the capture of the common characteristics of asymmetry and persistency, short and long-term, in the conditional volatility
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