Long memory properties and asymmetric effects of emerging equity market

Turkhan Ali Abdul Manap and Salina H. Kassim

Journal of Risk Finance, 2011, vol. 12, issue 5, 356-370

Abstract: Purpose - The purpose of this paper is to examine the long memory property of equity returns and volatility of emerging equity market by focusing on the Malaysian equity market, namely the Kuala Lumpur Stock Exchange (KLSE). Design/methodology/approach - The study adopts the Fractionally Integrated GARCH (FIGARCH) model and Fractionally Integrated Asymmetric Power ARCH (FIAPARCH), focusing on the Malaysian data covering the period from April 15, 2004 to April 30, 2007. Findings - The study finds evidence of long memory property as well as asymmetric effects in the volatility of the KLSE. The traditional ARCH/GARCH is shown to be insufficient in modeling the volatility persistence. The FIAPARCH specification outperforms the FIGARCH model by capturing both asymmetry effects and long memory in the conditional variance. Research limitations/implications - The results of this study have practical implications for the investors intending to invest in the emerging markets such as Malaysia. Understanding volatility and developing the appropriate models are important since volatility can be a measure of risk which is highly relevant in forecasting the conditional volatility of returns for portfolio selection, asset pricing, and value at risk, option pricing and hedging strategies. Originality/value - This study contributes in providing the empirical evidence on the long memory property of equity returns and volatility of an emerging equity market with reliable estimation models, which is currently lacking, particularly for emerging markets.

Keywords: Malaysia; Emerging markets; Equity capital; Stock returns; Stock exchanges; Long memory process; Fractionally Integrated Asymmetric Power ARCH; Stock market volatility (search for similar items in EconPapers)
Date: 2011
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Persistent link: https://EconPapers.repec.org/RePEc:eme:jrfpps:15265941111176109

DOI: 10.1108/15265941111176109

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