An Empirical Comparison of Linear and Nonlinear Volatility Models for Nordic Stock Returns

Sofie Kulp-Tåg ()
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Sofie Kulp-Tåg: Swedish School of Economics and Business Administration, Postal: Arkadiankatu 22, P.O.B. 479; FIN 00101 Helsinki, Finland

No 525, Working Papers from Hanken School of Economics

Abstract: This paper examines how volatility in financial markets can preferable be modeled. The examination investigates how good the models for the volatility, both linear and nonlinear, are in absorbing skewness and kurtosis. The examination is done on the Nordic stock markets, including Finland, Sweden, Norway and Denmark. Different linear and nonlinear models are applied, and the results indicates that a linear model can almost always be used for modeling the series under investigation, even though nonlinear models performs slightly better in some cases. These results indicate that the markets under study are exposed to asymmetric patterns only to a certain degree. Negative shocks generally have a more prominent effect on the markets, but these effects are not really strong. However, in terms of absorbing skewness and kurtosis, nonlinear models outperform linear ones.

Keywords: conditional variance; linear; nonlinear; skewness; kurtosis; parameter stability (search for similar items in EconPapers)
Pages: 24 pages
Date: 2007-04-12
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