Return Volatility and Asymmetric News Effect in Sri Lankan Stock Market

Abstract

This paper studies daily and monthly returns in the Colombo Stock Exchange (CSE) in order to identify dynamics of return series and find out whether asymmetric volatility exists in the market. The study is carried out employing symmetric GARCH model, EGARCH model and GARCH-M model with a sample period from January 1998 to June 2009. It was found that daily return exhibits ARCH effect and it is not normally distributed. The monthly return series found to be normally distributed and it does not exhibit ARCH effect. In-depth analysis on daily return using symmetric GARCH model has supported the fact that the daily return shows time-varying volatility with high persistence and predictability. Asymmetric EGARCH model has found the presence of asymmetric volatility indicating that the market reacts more to a negative than shock a positive shock of the same size. It was also found that risk-return relationship is not statistically significant, though it was found to be positive. These findings would be useful to policy makers, stock brokers and the investors in pricing, hedging and portfolio management and these models could be used to estimate and forecast volatility for risk management decision making at CSE.

Keywords: Asymmetric volatility, GARCH