Forecasting financial volatility of the Athens stock exchange daily returns: an application of the asymmetric normal mixture GARCH model

Anastassios A. Drakos, Georgios Kouretas and Leonidas P. Zarangas
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Anastassios A. Drakos: Department of Business Administration, Athens University of Economics and Business, Greece, Postal: Department of Business Administration, Athens University of Economics and Business, Greece
Leonidas P. Zarangas: Department of Finance and Auditing, Technological Educational Institute of Epirus, Greece, Postal: Department of Finance and Auditing, Technological Educational Institute of Epirus, Greece

International Journal of Finance & Economics, 2010, vol. 15, issue 4, 331-350

Abstract: In this paper we model the return volatility of stocks traded in the Athens Stock Exchange using alternative GARCH models. We employ daily data for the period January 1998 to November 2008 allowing us to capture possible positive and negative effects that may be due to either contagion or idiosyncratic sources. The econometric analysis is based on the estimation of a class of five GARCH models under alternative assumptions with respect to the error distribution. The main findings of our analysis are: first, based on a battery of diagnostic tests it is shown that the normal mixture asymmetric GARCH (NM-AGARCH) models perform better in modeling the volatility of stock returns. Second, it is shown that with the use of the Kupiec's tests for in-sample and out-of-sample forecasting performance the evidence is mixed as the choice of the appropriate volatility model depends on the trading position under consideration. Third, at the 99% confidence interval the NM-AGARCH model with skewed Student-distribution outperforms all other competing models both for in-sample and out-of-sample forecasting performance. This increase in predictive performance for higher confidence intervals of the NM-AGARCH model with skewed Student-distribution makes this specification consistent with the requirements of the Basel II agreement. Copyright © 2010 John Wiley & Sons, Ltd.

Date: 2010
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DOI: 10.1002/ijfe.407

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