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Time Varying Stock Market Volatility: The Case of an Emerging Market

Author Affiliations

  • 1Lahore School of Economics, PAKISTAN
  • 2 Teaching Fellow, Lahore School of Economics, PAKISTAN

Res. J. Recent Sci., Volume 1, Issue (11), Pages 41-46, November,2 (2012)


One of the key determinants for investment in financial markets is the tradeoff between risk and expected returns. While returns are relatively easy to quantify, the risk measurement has always posed challenges for investors. Engle’s (1982) proposition of time varying volatility has seriously challenged the use of standard deviation as a static estimate of risk. This phenomenon is more severe in emerging markets where stock prices are far from Gaussian world. In this paper, we examine the volatility patterns in Karachi Stock Exchange using GARCH framework between 2004 and 2012. We report that a period which witnessed significant growth vis-ŕ-vis market capitalization and trading volumes, volatility clustering was obvious. This implies that all estimates of risk in this period based on standard deviations must be flawed and would have understated the actual risk. This has serious implications because risk assessment plays a vital role in estimating cost of capital, firm valuations and capital budgeting. Based on our finding, we propose that higher order moments of returns should be considered for prudent risk assessment.


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