The results of GARCH-M model with three error distributions for all subset of data except for pre-debacle period showed that they were nonstationary (i.e., α+ β>1). Similar results were also revealed in EGARCH-M model with three error distribution where non-explosiveness condition (i.e., α+ β<1) was not satisfied. So, parameters were overestimated for both GARCH-M …show more content…
First, according to the leverage effect hypothesis proposed by Black (1976), financial leverage amplifies with the declines of the stock prices which contribute to increase the stock price volatility. Since these leverage effects are related or identical to asymmetric volatility, the presence of time-varying risk-return relationship could be reflected by asymmetric volatility. Second, the expected risk-return relationship can also help explain the leverage effect. The stock prices decline with the anticipation of higher risk/volatility which tends to increase expected returns. Since investors are rational and risk-averse, they demand less stock with an increase in volatility, causing a decline in stock