Modelling & Forecasting Volatility of Daily Stock Returns Using GARCH Models: Evidence from Dhaka Stock Exchange

Modelling volatility has become increasingly important in recent times for its diverse implications. The main purpose of this paper is to examine the performance of volatility modelling using different models and their forecasting accuracy for the returns of Dhaka Stock Exchange (DSE) under different error distribution assumptions. Using the daily closing price of DSE from the period 27 January 2013 to 06 November 2017, this analysis has been done using Generalized Autoregressive Conditional Heteroscedastic (GARCH), Asymmetric Power Autoregressive Conditional Heteroscedastic (APARCH), Exponential Generalized Autoregressive Conditional Heteroscedastic (EGARCH), Threshold Generalized Autoregressive Conditional Heteroscedastic (TGARCH) and Integrated Generalized Autoregressive Conditional Heteroscedastic (IGARCH) models under both normal and student’s t error distribution. The study finds that ARMA (1,1)- TGARCH (1,1) is the most appropriate model for in-sample estimation accuracy under student’s t error distribution. The asymmetric effect captured by the parameter of ARMA (1,1) with TGARCH (1,1), APARCH (1,1) and EGARCH (1,1) models shows that negative shocks or bad news create more volatility than positive shocks or good news. The study also provides evidence that student’s t distribution for errors improves forecasting accuracy. With such an error distribution assumption, ARMA (1,1)-IGARCH (1,1) is considered the best for out-of-sample volatility forecasting.