Modelling volatility of the market returns of Jordanian banks : empirical evidence using GARCH framework

Abstract EN

This paper investigates the intrinsic nature of volatility in three of the core indices and the Jordanian traditional banks individually that are traded in Amman stock exchange (ASE).

Daily stock market returns are used during the period beginning on 3rd January 2010 until 31st December 2015.

For this end, Generalized Autoregressive Heteroscedasticity (GARCH) and its extension GARCH-M models have been applied.

The results show that majority of the return series of the Jordanian commercial banks have negative skewness, relatively high kurtosis and provide evidence for departure from normal distribution.

The estimated models found evidence for existence of volatility clustering which is well captured within the GARCH framework.

The results obtained from the GARCH-M model are strongly consistent with the positive relationship between risk and return.

The findings also suggest that stocks of the banking sector provide a larger risk premium for investors compared with the whole market and the financial sector, since the estimated risk premium parameter was the highest one for the banking sector index relatively.