Modeling Asymmetric Effects and Long Memory in Conditional Volatility of Dhaka Stock Exchange: New Evidence from Family of FIGARCH Models

Muhammad Enamul Haque,Nusrat Farzana

doi:10.13189/ujaf.2021.090520

Muhammad Enamul Haque, Nusrat Farzana

Open Access

https://doi.org/10.13189/ujaf.2021.090520

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Abstract

This paper investigates modeling the conditional volatility of the Bangladesh equity market, namely the Dhaka Stock Exchange benchmark index (DSEX) and the Shariah Index (DSES), to explore the presence of leverage effects and long memory behavior covering the period from July 01, 2004 to December 31, 2020. We employ a family of Fractionally Integrated GARCH models FIFARCH BBM, FIGARCH CHUNG, FIEGARCH, FIAPARCH BBM, FIAPARCH CHUNG, and HYGARCH to capture both asymmetric effects and long memory behavior in conditional variance, a unique study in volatility literature. We detect strong evidence in favor of asymmetric effects and long memory behavior in the conditional volatility of DSEX and DSES returns, which repudiates the weak-form efficient market hypothesis. The study reveals FIEGARCH and FIAPRACH CHUNG outperform the other fractionally integrated GARCH specifications in modeling conditional volatility of equity returns. The paper further examines the diagnostic test of misspecification of the conditional variance equation based on the news impact curve, and results ensure that all models are fairly specified. This study also looks into the risk-return tradeoff in time-varying volatility and finds no evidence of the positive relationship between equity returns and volatility dynamics. The findings have pragmatic implications for retail and wholesale investors and other market players to initiate the investments and hedging strategies before investing in an emerging equity market like Bangladesh.

Highlights

The equity market is presupposed as a vehicle of investments involving inherent uncertainty in every economy
This paper models the conditional volatility of equity returns in Bangladesh to scrutinize the presence of the risk-return tradeoff, asymmetric effects, and long memory property covering from July 1, 2004 to December 31, 2020
We focus on two major equity market indices: the Dhaka Stock Exchange benchmark index (DSEX) and the Shariah Index (DSES)

Summary

Introduction

The equity market is presupposed as a vehicle of investments involving inherent uncertainty in every economy. Researchers and other equity market players adopt different measures to model the conditional variance of equity returns to explore some common properties of return volatility observed from empirical studies. Stylized facts are another name for these properties. Volatility clustering, seasonality effect, leverage effect, asymmetric effect, long memory, risk-return tradeoff, and other stylized facts are well-known to be exemplified by asset prices [1], [2]. The observed properties in returns volatility are more articulated in emerging markets than developed equity markets, as supported by empirical studies [3] - [8]

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