Working Papers, Hanken School of Economics
An Empirical Comparison of Linear and Nonlinear Volatility Models for Nordic Stock Returns
Abstract: This paper examines how volatility in financial markets
can preferable be modeled. The examination investigates how good the models
for the volatility, both linear and nonlinear, are in absorbing skewness
and kurtosis. The examination is done on the Nordic stock markets,
including Finland, Sweden, Norway and Denmark. Different linear and
nonlinear models are applied, and the results indicates that a linear model
can almost always be used for modeling the series under investigation, even
though nonlinear models performs slightly better in some cases. These
results indicate that the markets under study are exposed to asymmetric
patterns only to a certain degree. Negative shocks generally have a more
prominent effect on the markets, but these effects are not really strong.
However, in terms of absorbing skewness and kurtosis, nonlinear models
outperform linear ones.
Keywords: conditional variance; linear; nonlinear; skewness; kurtosis; parameter stability; (follow links to similar papers)
24 pages, April 12, 2007
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