Asymmetric Fractionally Integrated Volatility Modelling of Asian Equity Markets under the Subprime Mortgage Crisis

Cheong Chin, Ng Sew Lai, Nurul Afidah Mohmad Yusof and Khor Chia Ying

Journal of Quantitative Economics, 2012, vol. 10, issue 1, 70-84

Abstract: The fractionally integrated asymmetric power autoregressive conditional heteroscedasticity model has successfully captured the empirical stylized facts such as the leverage effect, power transformation and long memory in the foreign exchange markets. This study further explores the applicability of this model in the Asian equity markets under the impact of the 2008 United States subprime mortgage crisis. The empirical stylized facts of the markets are examined before and after the Lehman Brothers filed for bankruptcy protection in year 2008. The important findings of this empirical study are as follows: First, majority of the Asian equity markets are more appropriate in conditional variance representation than conditional standard deviation based on their power transformation results. Second, all the equity markets’ leverage effect and magnitude appear to increase after the failing of the Lehman Brothers. Third, most of the long memory volatility intensities have the tendencies of declining across the crisis periods. From the explanation of heterogeneous market hypothesis, majority of the Asian mature markets become more efficient after the bankruptcy of Lehman Brothers whereas emerging markets with no direct investment may be affected by other factors such as political crisis or domestic economic issues and appeared to indicate fluctuating and descending long memory.

Date: 2012
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