A COMPARISON OF STYLIZED FACTS IN CONVENTIONAL AND ISLAMIC MARKET IN MALAYSIA USING COMPONENT GARCH MODEL

Abstract

This paper study the most common discussing empirical facts which are the volatility persistence, volatility clustering, risk premium, leverage effects and tail behavior that normally arise in the stock market returns of conventional market and Islamic market in Malaysia. The model used are GARCH (1,1), TARCH(1,1) and CGARCH(1,1). The first result reveals that TGARCH with student’s t distribution is the best fitted model which is explained by using AIC and SIC analysis. The significant coefficient of long memory in CGARCH model in both markets suggest that CGARCH provide best fit for long memory behavior. The empirical results estimation suggests that the conditional variance is highly persistence and the volatility clustering is observed in conventional and Islamic markets. The positive coefficients of risk premium suggest that both conventional and Islamic stock markets exhibit higher returns with higher level of risk. The coefficient of leverage effects is significant and positive for both conventional and Islamic markets.

Keywords: Volatility persistence, Risk premium, Leverage effects, Tail behavior