Stock Return Volatility and World War II: Evidence From Garch and Garch-X Models

✍ Scribed by Taufiq Choudhry

• Publisher: John Wiley and Sons
• Year: 1997
• Tongue: English
• Weight: 150 KB
• Volume: 2
• Category: Article
• ISSN: 1076-9307
• DOI: 10.1002/(sici)1099-1158(199701)2:1<17::aid-ijfe36>3.0.co;2-s

✦ Synopsis

This paper investigates the long-run relationship between stock indices of different countries and the effect of short-run deviations from the relationship on stock returns volatility. Monthly stock indices from Canada, Denmark, Sweden, Switzerland, the United Kingdom and the United States during January 1926-December 1944 are applied in the empirical study. The period under study includes the stock market crash of October 1929 and World War II, among other political and economic events. The long-run relationship is investigated by means of the cointegration tests, and the effect of short-run deviations on stock returns volatility is studied by means of the GARCH models. The GARCH model applied takes into consideration the possible structural shift of volatility due to the depression years 1929-1933, which also include the stock market crash of 1929. The GARCH model also compensates for the possible negative correlation between current returns and future volatility, known as the leverage effect. Results indicate a significant long-run relationship between the stated indices, and results also show significant effect of deviations on the stock returns volatility. The presence of short-run deviations in the volatility function may be exploited to obtain more precise point forecasts of stock price changes. Some evidence of the structural shift in volatility due to the depression years is found, while very little support is found for the leverage effect.