Testing the relationship between the stock market and Time series model - Essay Example

ionship between the stock market and Time series model” is aimed at explaining the volatility modelling used for stock market analysis, thus evaluating the performance of the ARCH and GARCH models. Data from four Asian stock market indices like Hang Seng index, Jakarta index, KLSE index and Stock exchange of Thailand index during 2000 to 2006 have been used in this study. The analysis helped to reach a conclusion that EGARCH is the best model among the GARCH family which helps in estimating the volatility of stock market to predict the stock market for future investment.

By analysing recent developments in the stock exchanges gathered from newspaper reports, it is seen that a common question could be posed among the investors in stock. The question is “Is the stock market predictable?” It has become the main concern of many researchers for the last 20 years due to the up and down fluctuations leading to a large volatility. There are many stock market prediction tools contributed by different researchers which are helpful to both the public and institutions.

There arises a question as to why a tool is required to predict the stock market due to the complexity of the stock market which is mainly influenced by economical, political, and monetary features. However, the fact is that markets’ reaction against each economic shock (i.e. bad news and good news) may vary from country to country due to their own macro economical and financial characteristics. For example, statistics show that Asian shares have fallen dramatically which is as follows: Tokyo by 11%, London Stock exchange by 5.

7%, Hang Seng by 7.6%, India’s by 4%, Australia by 6.7% etc. (Wall Street shares yo-yo n.d.). For that reason, it is necessary to use several models to forecast volatility as well as evaluate them. It is seen that South Eastern stock exchanges have responded with lesser impact to the economic recession than European and American economies. The selected countries for this