3.

1 CONDITIONAL VOLATILITY ESTIMATION

For volatility analysis an ARCH type models are used having time varying and conditional
variance property in model. ARCH type family models normally include lags in conditional
variance as well as volatility is captured by forecasting equation of time varying models. These
models include ARCH, GARCH and for further analysis EGARCH models have been used
(Kumar et.al. 2008)
AR CH Model
The basic specification of ARCH model is given as From above equation, the stock market monthly
prices, conditional mean a and error term are represented. The final equation for measurement of
conditional variance can be written as:

p t t 1 t

t wt t
Where

t N (0, 2 t )

2 t 0 i 2 t 1
i 1

In this conditional variance equation, the pameters must be 0 0and i 0.

ARCH model has problem that its only estimate lags variables.
GARCH Model

Bollerslev (1986) proposed GARCH (p,q) model that measure volatility which is effected by past
prices and past lags denoted(Q,P) respectivlity.
p t t 1 t

t wt t

Where

t N (0, 2 t )
The final equation of conditional variance can be written as:
q

i 1

j 1

2 t 0 i 2 t i j 2 t j

i 1.............q, j 1........... p

The conditional variance is linear function of q lags and p lags of past values of conditional

variance or GARCH terms.

EGARCH Model

Exponential GARCH (EGARCH) model is preferred over GARCH model because it has
asymmetric property as well as size, leverage effect and lags effect. The EGARCH model is
extension of GRACH model because it incorporates positive and negative in model through
logarithmic form.EGARCH model capture the price voalitilty aspect
p t t 1 t

Where

t wt t

t N (0, 2 t )
log 2 t 0 1 2 t 1 (

t 1

2
) t 1 [ t 1 ( ) 0.5 ]
t 1
t 1