Risk and Prospective Returns: The Case of European and Asian Financial Markets

ABSTRACT

The paper examines the use of different GARCH type models to capture the impact of normal movement and the impact during a crisis (e.g., Covid pandemic) for capturing the volatility of randomly selected stock markets in European and Asian countries. This case is based on daily data from DAX - Germany, IBEX- Spain, CAC - France, BEL - Belgium, ATX - Austria, SZSE - China, NIKKEI - Japan, KOSPI - South Korea, IKSE - Indonesia, and HANG SENG - Hong Kong. It is found that GARCH is the most robust model to estimate volatility even during a crisis period;EGARCH demonstrates persistence in volatility and capturing leverage effects;EGARCH also remains the best quality model, apart from the symmetric model. Further, the models captured difference in magnitudes of European and Asian stock markets with different volatility movement patterns. Some Asian markets showed more adverse performance than European markets during the same time-period creating differences in asset pricing, risk magnitudes and prospective returns. The study demonstrates the relative effect on asset prices and changes in values of investors and determines the parameter for risk and returns in Europe and Asia.