A multi-country study of power ARCH models and national stock market returns

Ding et al. (1993) [Ding, Z., Granger, C.W.J., Engle, R.F., 1993. A long me mory property of stock market returns and a new model. Journal of Empirical Finance 1, 83-106] suggested a model which extends the ARCH family of mode ls for analyzing a wider class of power transformations than simply taking the absolute value or squaring the data as in the conventional conditional heteroscedastic models. This paper analyzes the applicability of these powe r ARCH (PARCH) models to national stock market returns for 10 countries plu s a world index. We find the PARCH model to be generally applicable once GA RCH and leverage effects are taken into consideration. In addition, we also find that the optimal power transformation is remarkably similar across co untries. (C) 2000 Elsevier Science Ltd. All rights reserved.