Journal of Economics and Finance

, Volume 28, Issue 2, pp 211–225 | Cite as

Modeling volatility in sector index returns with GARCH models using an iterated algorithm

  • Farooq Malik
  • Syed Aun Hassan


Financial market participants are interested in knowing what events can alter the volatility pattern of financial assets and how unanticipated shocks determine the persistence of volatility over time. The present paper studies these issues by detecting time periods of sudden changes in volatility by using the iterated cumulated sums of squares (ICSS) algorithm. Examining five major sectors from January 1992 to August 2003, we found that accounting for volatility shifts in the standard GARCH model considerably reduces the estimated volatility persistence. Our results have important implications regarding asset pricing, risk management, and portfolio selection. (JEL G110, G120)


Stock Return Regime Shift GARCH Model Technology Sector Index Fund 
These keywords were added by machine and not by the authors. This process is experimental and the keywords may be updated as the learning algorithm improves.


Unable to display preview. Download preview PDF.

Unable to display preview. Download preview PDF.


  1. Aggarwal, R, C. Inclan, and R. Leal. 1999. “Volatility in Emerging Markets.”Journal of Financial and Quantitative Analysis 34: 33–55.CrossRefGoogle Scholar
  2. Atteberry, W.L., and P.E. Swanson. 1997. “Equity Market Integration: The Case of North America.”North American Journal of Economics and Finance 8: 23–37.CrossRefGoogle Scholar
  3. Andersen, T. G. and T. Bollerslev. 1998. “Answering the Skeptics: Yes, Standard Volatility Models Do Provide Accurate Forecasts.”International Economic Review 39: 885–905.CrossRefGoogle Scholar
  4. Bollerslev, T. 1986. “Generalized Autoregressive Conditional Heteroscedasticity.”Journal of Econometrics 31: 307–327.CrossRefGoogle Scholar
  5. Bollerslev, T., R.Y. Chou, and K.F. Kroner. 1992. “ARCH Modeling in Finance: A Review of the Theory and Empirical Evidence.”Journal of Econometrics 52: 5–59.CrossRefGoogle Scholar
  6. Cai, J. 1994. “A Markov Model of Switching-Regime ARCH.”Journal of Business and Economic Statistics 12: 309–316.CrossRefGoogle Scholar
  7. Campbell, J. Y., M. Lettau, B.G. Malkiel, and Y. Xu. 2001. “Have Individual Stock Become More Volatile? An Empirical Exploration of Idiosyncratic Risk.”Journal of Finance 56: 1–43.CrossRefGoogle Scholar
  8. Chen, N., R. Roll, and S. Ross. 1986. “Economic Forces and the Stock Market.”Journal of Business 59: 383–403.CrossRefGoogle Scholar
  9. Engle, R.F. 1982. “Autoregressive Conditional Heteroscedasticity with Estimates of the Variance of U.K. Inflation.”Econometrica 50: 987–1007.CrossRefGoogle Scholar
  10. Engle, R.F., and T. Bollerslev. 1986. “Modeling the Persistence of Conditional Variances.”Econometric Reviews 5: 1–50.CrossRefGoogle Scholar
  11. Engle, R., T. Ito, and W. Lin. 1990. “Meteor Showers or Heat Waves?: Heteroscedasticity Intra-Daily Volatility in the Foreign Exchange Markets.”Econometrica 58: 525–542.CrossRefGoogle Scholar
  12. Ewing, B.T. 2002. “The Transmission of Shocks among S&P Indexes.”Applied Financial Economics 12: 285–290.CrossRefGoogle Scholar
  13. Fleming, J., C. Kirby, and B. Ostdiek. 1998. “Information and Volatility Linkages in the Stock, Bond, and Money Markets.”Journal of Financial Economics 49: 111–137.CrossRefGoogle Scholar
  14. Geske, R., and R. Roll. 1983. “The Monetary and Fiscal Linkage between Stock Returns and Inflation.”Journal of Finance 38: 1–33.CrossRefGoogle Scholar
  15. Hamilton, J.D. and R. Susmel. 1994. “Autoregressive Conditional Heteroscedasticity and Changes in Regime.”Journal of Econometrics 64: 307–333.CrossRefGoogle Scholar
  16. Inclan, C., and G.C. Tiao. 1994. “Use of Cumulative Sums of Squares for Retrospective Detection of Changes of Variance.”Journal of the American Statistical Association 89: 913–923.CrossRefGoogle Scholar
  17. Karolyi, G.A. 1995. “A Multivariate GARCH Model of International Transmissions of Stock Returns and Volatility: The Case of the United States and Canada.”Journal of Business and Economic Statistics 13: 11–25.CrossRefGoogle Scholar
  18. Kolb, R.W. 1997. Options. Malden, MA: Blackwell Publishers, Inc.Google Scholar
  19. Lamoureux, C.G., and W.D. Lastrapes. 1990. “Persistence in Variance, Structural Change and the GARCH Model.”Journal of Business and Economic Statistics 68: 225–234.CrossRefGoogle Scholar
  20. Lastrapes, W.D. 1989. “Exchange Rate Volatility and U.S. Monetary Policy: An ARCH Application.”Journal of Money, Credit and Banking 21: 66–77.CrossRefGoogle Scholar
  21. Lee, B.S. 1992. “Causal Relations among Stock Returns, Interest Rates, Real Activity, and Inflation.”Journal of Finance 47: 1591–603.CrossRefGoogle Scholar
  22. Lobo, B.J. 2002. “Large Changes in Major Exchange Rates: A Chronicle of the 1990s.”Applied Financial Economics 12: 805–811.CrossRefGoogle Scholar
  23. Malik, F. 2003. “Sudden Changes in Variance and Volatility Persistence in Foreign Exchange Markets.”Journal of Multinational Financial Management 13: 217–230.CrossRefGoogle Scholar
  24. Payne, J.E., B.T. Ewing, and C. Sowell. 1999. “NAFTA and North American Stock Market Linkages: An Empirical Note.”North American Journal of Economics and Finance 10: 443–451.CrossRefGoogle Scholar
  25. Poterba, J.M., and L. Summers. 1986. “The Persistence of Volatility and Stock Market Fluctuations.”American Economic Review 76: 1143–1151.Google Scholar
  26. Ross, S.A. 1989. “Information and Volatility: The No-Arbitrage Martingale Property to Timing and Resolution Irrelevancy.”Journal of Finance 44: 1–17.CrossRefGoogle Scholar
  27. Serletis, A., and M. Sondergard. 1996. “Permanent and Temporary Components of Canadian Stock Prices.”Applied Financial Economics 6: 259–269.CrossRefGoogle Scholar
  28. Thorbecke, W. 1997. “On Stock Market Returns and Monetary Policy.”Journal of Finance 52: 638–654.CrossRefGoogle Scholar

Copyright information

© Springer 2004

Authors and Affiliations

  1. 1.Department of Economics and FinancePennsylvania State University-Berks CampusReading
  2. 2.Department of EconomicsTexas Tech UniversityLubbock

Personalised recommendations