The Sources of Stock Market Volatility: A Study on the Colombo Stock Exchange
VUCA and Other Analytics in Business Resilience, Part A
ISBN: 978-1-83753-903-1, eISBN: 978-1-83753-902-4
Publication date: 13 May 2024
Abstract
Purpose: This study investigates internal/own shock in the domestic market and three external volatility spillovers from India, the UK, and the USA to the Sri Lanka stock market.
Need for the Study: The external market’s internal/own shocks and volatility spillovers influence portfolio choices in domestic stock market returns. Hence, it is required to investigate the internal shock in the domestic market and the external volatility spillovers from other countries.
Methodology: This study employs a quantitative method using ARMA(1,1)-GARCH(1,1) model. All Share Price Index (ASPI) is the proxy for the Colombo Stock Exchange (CSE) stock return. It uses daily time-series data from 1st April 2010 to 21st June 2023.
Findings: The findings revealed that internal/own and external shocks substantially impact the stock price volatility in CSE. Significant volatility clusters and persistence with extended memory in ASPI confirm internal/own shock in the market. Furthermore, CSE receives significant volatility shock from the USA, confirming external shock. This study’s findings highlight the importance of considering internal and external shocks in portfolio decision-making.
Practical Implications: Understanding the influence of internal shocks helps investors manage their portfolios and adapt to market volatility. Recognising significant volatility spillovers from external markets, especially the USA, informs diversification strategies. From a policy standpoint, the study emphasises the need for robust regulations and risk management measures to address shocks in domestic and global markets. This study adds value to the literature by assessing the sources of volatility shocks in the CSE, employing the ARMA-GARCH, a sophisticated econometrics model, to capture stock returns volatility, enhancing understanding of the CSE’s volatility dynamics.
Keywords
Citation
Riyath, M.I.M., Dewasiri, N.J., Siraju, M.A.M.M., Jahfer, A. and Sood, K. (2024), "The Sources of Stock Market Volatility: A Study on the Colombo Stock Exchange", Singh, D., Sood, K., Kautish, S. and Grima, S. (Ed.) VUCA and Other Analytics in Business Resilience, Part A (Emerald Studies in Finance, Insurance, and Risk Management), Emerald Publishing Limited, Leeds, pp. 127-149. https://doi.org/10.1108/978-1-83753-902-420241006
Publisher
:Emerald Publishing Limited
Copyright © 2024 Mohamed Ismail Mohamed Riyath, Narayanage Jayantha Dewasiri, Mohamed Abdul Majeed Mohamed Siraju, Athambawa Jahfer and Kiran Sood