A Decade of Shocks!
Apr 19, 2005
A visual inspection of the stock price data of almost all major stock indices of the world during the decade of the Nineties will show that the equity markets become very volatile during this period. The question is whether this was due to a structural change in the return generating process, or simply the result of an intensification of shocks to the system.
Some researchers, using GARCH (1,1) type models have concluded - and we believe, our janitor could do the same without the research - that the observed increase in the index return volatility appears to be the result of more and bigger shocks to the system and not of a structural change in the return generating process.
(Reference: Structured Equity Derivatives by Harry M. Kat).
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