Market Conditions Asymmetries and Asset Pricing: An Information Asymmetry Perspective of Volatility Modeling in Pakistan

Abstract

Volatility modeling remained a fabulous concept in the field of financial economics and this concept is dynamic due to time varying phenomenon. The purpose of this study is to identify the information asymmetry perspective of volatility modeling by considering the market conditions asymmetries for asset pricing in the equity market of Pakistan. For this purpose daily data of KSE-100 has been taken for the period of Jan 2000-Dec 2016. GARCH-in-Mean is modeled with Market Conditions Asymmetry and moreover Sign and Size Bias Test, TGARCH and EGARCH model is tested for shocks and news effects caused through information asymmetry. Results indicate that leverage effect, and asymmetric effects exist and past price behavior influences the current price volatility and hence shows persistent behavior of the volatility in the market. TGARCH model reports that volatility persists for long run and demonstrates an established indicator for an integrated process. EGARCH (1,1) shows the negative asymmetric term indicates the presence of leverage effect. The volatility response is automatically adjusting for good and bad news effects. However bad news creates more volatility in comparison to good news. The volatility is captured by GARCH-in-Model in an excellent way because it has lower AIC and SIC values and the performance of this model cannot be rejected in comparison to GARCH and EGARCH. It is visualized from the facts that GARCH-in Mean Model with extension of Market condition asymmetry introduced in this study has better capacity for capturing the asymmetric effects for KSE market volatility than TGARCH and EGARCH model from information asymmetric perspective in Pakistan.