E-Garch and Modeling of Market Volatility Based on Noise Trading

Subject Areas : Financial Knowledge of Securities Analysis

Abdolmajid  Abdolbaghi ¹ (Assistant Professor of Finance, Shahrood University of Technology, Iran)
Siavash  Sbour ² (Master of Financial Engineering and risk management, Shahid Ashrafi Esfahani, Esfahan, Iran ,)
Maryam  Bagheri Rafi ³ (Master of Financial Engineering and risk management, Shahid Ashrafi Esfahani, Esfahan, Iran)

Received: 2018-04-01 Accepted : 2018-09-11 Published : 2019-12-22

Keywords: Behavioral Finance, Noise Trading, Market Fluctuations, E-Garch,

Abstract :

The presence of noise traders with fanatical attitude in financial markets is considered as a reason for the divergence of price and risk from predicted levels, but on the other hand the absence of noise traders might cause dwindling of market volatility. Generally, those who execute their trades based on market noise have poor understanding of the validity of receiving information, nevertheless a major part of traders falls into this category. The following study evaluated fluctuation of noise trading, using EGARCH (exponential general autoregressive conditional heteroscedastic) model for the price index of the Tehran stock exchange market from 2012 to 2016. There was a meaningful relation between the noise and market return, so that an increase in noise trading resulted in market return growth and a decline in noise trading altered fluctuation to a smoother trend. Furthermore, the growth of trade value, turnover and number of trades was related to the rise in noise trading.

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