An application of GARCH while investigating volatility in stock returns of the World
A healthy stock market is a sign of sound and healthy economy. Stock market is a volatile market affected, at times directly and most often indirectly, by many micro and macroeconomic players. Of these players interest rates and exchange rates are among the ones undertaken in this study. The rationale behind this study is to ascertain the volatility in stock returns of various stock exchanges in relevance to interest rates and exchange rates over a range of 8 countries for assorted periods. GARCH (1, 1) was deployed for investigating the possible eventualities of volatilities of stock markets. The findings were found varying for Pakistan, India, Hong Kong, Japan, United States, United Kingdom, Spain and Germany. Moreover, almost for all countries GARCH (1, 1) yielded significant results confirming the existence of volatility of stock markets for the current period of outlined countries due to volatility of those stock markets during the previous lags. The findings may help investors know the stock markets’ trends which are also for some cases (nations) affected by interest rates and/or exchange rates and thus to invest accordingly.