Forecasting Volatility of Dhaka Stock Exchange: Linear Vs Non-linear models

Masudul Islam (Statistics Discipline, Khulna University, Khulna-9208)
Lasker Ershad Ali (Statistics Discipline, Khulna University, Khulna-9208)
Nahida Afroz (Statistics Department, Mawlana Bhashani Science and Technology University, Santosh, Tangail-9102)

International Journal of Science and Engineering (IJSE)
Vol 3, No 2 (2012)

Prior information about a financial market is very essential for investor to invest money on parches share from the stock market which can strengthen the economy. The study examines the relative ability of various models to forecast daily stock indexes future volatility. The forecasting models that employed from simple to relatively complex ARCH-class models. It is found that among linear models of stock indexes volatility, the moving average model ranks first using root mean square error, mean absolute percent error, Theil-U and Linex loss function  criteria. We also examine five nonlinear models. These models are ARCH, GARCH, EGARCH, TGARCH and restricted GARCH models. We find that nonlinear models failed to dominate linear models utilizing different error measurement criteria and moving average model appears to be the best. Then we forecast the next two months future stock index price volatility by the best (moving average) model.