Comparing Between Multivariate Volatility Models in Estimation of Exchange Rate and Stock Index Relationship

Subject Areas : Journal of Investment Knowledge

Hosein Abbasinejad ¹ (Professor of Economics, University of Tehran , E-mail:[e-mail])
Shapour Mohammadi ² (Associate Professor, University of Tehran , E-mail:[e-mail])
Sajad Ebrahimi ³ (Ph.D. student of Economics, University of Tehran, E-mail : [e-mail])

Received: 2013-11-06 Accepted : 2014-04-08 Published : 2014-04-08

Keywords: Stochastic volatility (SV), Value at Risk (VaR), multivariate garch, stock index, exchange rate,

Abstract :

Financial variables volatility as basic factor of financial assets pricing, has been observed by many studies. In addition to GARCH model as common model for volatility estimation, stochastic volatility (SV) model is another approach that rarely is applied in research. In this paper base of daily data from 1381 until 1392 exchange rate and Tehran stock index volatilities are estimated by applying bivariate stochastic volatility (SV). In order to evaluating the result, a loss function is formed based on value at risk(VaR) and then volatility models result(including stochastic volatility(SV) and GARCH) compare to each other. According to Loss function comparing result, BEKK-GARCH with t student distribution has more accurate estimation of exchange rate and stock market index volatilities. In addition, the results of the best model show that increasing exchange rate growth leads to stock index growth, but stock market changes have not significant effect on exchange rate growth. Also rising in volatility of a market causes increasing in volatility in another one.