Abstract
The subject of this research is to analyze and test the modified GARCH methodology in terms of quantifying the impact of inflation rates, interest rates on government bonds, reference interest rates, and exchange rates on daily rates of return on investment activities in the observed financial markets of North America, Serbia and Croatia. The aim of the research, i.e. a special focus in the research, is to compare the obtained results between the developed financial markets and the financial markets of developing countries, as well as to test the modified GARCH methodology in the observed financial markets. The key indicators in the research, presumed to affect the daily return rates, were the following: inflation rate, interest rates on government bonds, reference interest rate and exchange rate. The time period covered by the research is from 2005 to 2017, where the width of the research time horizon allows testing the modified GARCH methodology in the periods before, during and after the global financial crisis. In addition to the use of modified GARCH econometric models, the research methodology includes the use of AIC, SIC and HQC (Akaike, Schwarz and Hannan-Quinn) criteria for selecting the best models, as well as the appropriate tests that are suitable for and/or adapted to the specific characteristics of financial markets of both developed and developing countries. The research results confirm the role and importance of the modified GARCH methodology for effective investment risk quantification in developed financial markets versus the financial markets of developing countries. In this sense, the obtained research results will be useful to both the academic community and the professional public in the context of investment decision making.
Highlights
The subject of this research is to analyze and test the modified generalized autoregressive conditional heteroscedasticity (GARCH) methodology in terms of quantifying the impact of inflation rates, interest rates on government bonds, reference interest rates, and exchange rates on daily rates of return on investment activities in the observed financial markets of North America, Serbia and Croatia
In order to quantify the impact of macroeconomic factors on daily return rates of stock exchange indices, the modified GARCH 1.1, TARCH and EGARCH models were used to assess the impact on all observed financial markets and in all observed periods
Of the paper, we will present the results of the modified GARCH models, and analyse and quantify the impact of macroeconomic factors from the aspect of investment activities on the developed versus the emerging financial markets
Summary
Using the asymmetric GJR-GARCH model, the study by Cakan et al (2015) analyses the impact of US macroeconomic news on the volatility of the daily return rates of the twelve emerging markets. In the research by Rejeb and Arfaoui (2016), the degree and structure of interdependence between emerging (Asian and Latin American) and developed (the USA and Japan) stock markets were examined through the study of volatility spillovers in the period 1993-2010 Using both standard GARCH model and quantile regression approach, they found the evidence of significant interdependence between financial markets which might give evidence of volatility transmission. Using a variant VARGARCH data model at a quarterly level for twelve emerging economies, they found significant significant bidirectional spillovers between stock and foreign exchange markets They investigated the effects of a country’s choice of exchange rate regime, on the one hand, and the Asian financial crisis, on the other, on the volatility spillover mechanism. Due to the outbreak of the global economic crisis, as well as the redefinition of market relations and business conditions, the presentation of different risk management models of investment activities is in the focus of many researchers
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