Pricing of risk and volatility dynamics on an emerging stock market: evidence from both aggregate and disaggregate data

摘要

This study analyses risk-return trade-off and behaviour of variousvolatility dynamics including: volatility, its persistence, meanreversion and speed of mean reversion along with asymmetryand leverage effect on the Pakistani stock market by employingaggregate (aggregate market level) and disaggregate (sectoral level)monthly data for the period from 1998 to 2012. Three generalisedautoregressive conditional heteroscedasticity models were applied:GARCH (1,1) for various volatility dynamics; EGARCH for asymmetricand leverage effect and GARCH-M for pricing of risk. The outcomes ofthe study are as follows: first, the volatility shocks are quite persistentbut with varying degrees across the sectors. Both the ARCH effect(short-term effect) and GARCH effect (long-term effect) play theirrole in generating conditional future stock returns volatility. Further,overall the volatility process is mean reverting; however, the speedof mean reversion varies across the sectors. Secondly, the currentstudy finds little evidence of asymmetry and leverage effect at bothaggregate and disaggregates data. Thirdly, the pricing of risk (positive risk premium) is also evident, particularly at the disaggregate data in the Pakistani stock market. Finally, this research study sets the implications for both the policy makers and investors.