Abstract
This paper attempts to investigate the impact of Volatility on Market Returns among the Stock Markets of SAARC countries. The graphical presentation showed that stock markets have stochastic trend and are correlated. GARCH(1,1) model was used which concludes a significant ARCH (1) and GARCH (1) effects and confirms all markets’ returns are statistically significant since p < 0. The results show that the market volatility has significant influence on the stock market returns. This influence varies in degree among the Stock Markets of SAARC countries. The association between stock returns and returns volatility has been studied by many financial researchers (Chen, Firth, & Rui, 2001). The emerging stock markets of developing countries and underdeveloped countries gained little focus ( Sheikh, Shah, & Mahmood, 2017). As the globalization emerged the global markets are now more integrated. And the investors now enjoy a more diversified portfolio (Ahmed, Raheem, Weinhardt, & Streimikiene, 2016). The size of trading activity of financial instruments (volume) or changes in the size of trading activity is the major source for the price and return volatility and it is considered as the process of information diffusion in the capital markets ( Yu-Sheng, Hwei-Lin, & Yu-Cheng, 2018). In the past literature the trading volume is viewed as substitute for information transmission into the financial markets because the information movement cannot be observed (Lamoureux & Lastrapes, 1990a, 1990b). When information about an asset is disseminated into market it appears in the form of price and volume change, therefor, the information stream in the financial market is captured by the dynamics of returns, volume and volatility (Garg & Sampath, 2018). Despite widespread research, the association between stock returns and market volatility is still subject to discussion (Chung, Fung, Shilling, & Simmons–Mosley, 2016). The research on capital markets conventionally focuses on prices of the securities and their behavior over the period. Conversely, due to non-stationarity in the prices of capital securities, the researchers prefer to study stock returns (Medeiros & Van Doornik, 2006). The capital returns of the firm reflects expectations of the investors about the forthcoming performance of the company. The influx of information to the market compel investors to adjust their prospects. The arrival of new information is primary cause for return and price changes. Yet, investors have different level of understanding due to which the price may remain unchanged. It shows that the changes in price - 73 - only reflects the ordinary reaction of the investors to the new information. However, the rise in volume of the trade is always linked with the revision in investor’s expectations (Medeiros & Van Doornik, 2006). Hence, learning the mutual dynamics of capital returns, volume of the trade and volatility increases the understanding of inside structure of the capital markets. Therefore, the impact of returns volatility, on capital returns will be investigated in this study. The results of this research provide comprehensive evidence regarding behavior of South Asian stock markets, this study contributes to the expansion of theoretical work on the association of stock index returns, and volatility. Furthermore, this study is of great benefit to the stock market players, portfolio managers, and investors as this compares the performance of different stock market indices of SAARC countries. The literature has shown that studying the relationship between stock market returns and volatility is important because of numerous reasons. First for the construction of various financial theories and models the nature of stock return performance is vital. Secondly, stock return volatility is fundamental to finance, whether in asset pricing, portfolio selection, or risk management (Okičić, 2014). Furthermore, the previous literature also disclosed that very little studies are conducted on the impact of volatility on stock market returns in the underdeveloped stock markets, with even less research studies on the capital markets of SAARC countries. Therefore, detailed studies are required to examine the behavior of emerging stock markets of developing and underdeveloped countries. Consequently, my paper we will attempt to determine the above stated relation in stock returns from the SAARC countries. The research papers is continued as follows; In section 2 literature review is provided, section 3 discuss the research methodology and frame work, section 4 presents the empirical analysis and section 5 summarizes conclusion.
Shahid Ali , Uzma Mukhtar, Nadir Khan. (2020) Stock Market Returns and Volatility: A Comparative Analysis of South Asian Association for Regional Cooperation (SAARC) Countries Stock Markets, Balochistan Review, Volume 2, Issue 2.
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