Modeling Asymmetric Volatility in the Indian Stock Market

Abstract

This paper studied the effects of good and bad news on volatility in the Indian stock markets using asymmetric ARCH models during the global financial crisis of 2008-09. The BSE500 stock index was used as a proxy to the Indian stock market to study the asymmetric volatility over 10 year’s period. Two commonly used asymmetric volatility models i.e. EGARCH and TGARCH models were used. The BSE500 returns series found to react to the good and bad news asymmetrically. The presence of the leverage effect would imply that the negative innovation (news) has a greater impact on volatility than a positive innovation (news). This stylized fact indicates that the sign of the innovation has a significant influence on the volatility of returns and the arrival of bad news in the market would result in the volatility to increase more than good news. Therefore, we conclude that, bad news in the Indian stock market increases volatility more than good news.