Abstract
Study of stock market volatility has been the focus of financial economics. Modelling stock market volatility has great contributions to make in the areas of portfolio management, asset allocation, risk management, etc. We estimate the conditional volatility of Saudi stock market by applying AR (1)-GARCH (1, 1) model to the daily stock returns data spanning from August 1, 2004 to October 31, 2013. We show that a linear symmetric GARCH (1, 1) model is adequate to estimate the volatility of the stock market of the country. We find that Saudi stock market returns are characterised by volatility clustering and follow a non-normal distribution. Saudi stock market returns show a time varying volatility, show persistence and are predictable. Past volatility impacts the current period volatility and past returns play a role in determining the current period return. Saudi stock market is nervous in its reactions to market fluctuations. This finding of the study offer important input into the decisions relating to asset allocation and risk management strategies of investors and treasury managers in Saudi stock market.
Highlights
A stock’s volatility gives the range of its outcomes. Markowitz (1952) defined risk as volatility
In order to determine the dynamics of the conditional mean, we look at the Schwarz information criterion (SIC) to decide on the ARMA specification appropriate for modelling Saudi stock market returns
Modelling and forecasting volatility of stock market returns is an important area of research in financial economics
Summary
A stock’s volatility gives the range of its outcomes. Markowitz (1952) defined risk as volatility. There is a large number of research studies that examine stock market volatility carried out in the context of both developed and developing countries Such a study does not exist for Saudi Arabia. The review of literature on the stock market volatility studies shows that varied range of econometric models are employed by the studies and no single model has emerged superior till date. This requires the study of every single market to help the investors and the regulators as no general lessons can be drawn based on the studies carried out elsewhere. The reminder of this study is organized as follows: section 2 discusses a brief review of previous works; section 3 presents some stylized facts about Saudi stock market prices and returns; Section 4 narrates the data and methodology used by the study; section 5 presents the results and section 6 gives the concluding remarks
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