Volatility Analysis of Nepalese Stock Market

The modeling and forecasting of volatility in capital markets has been an important area of research in financial economics, particularly with the recognition of time-varying volatility, volatility clustering, and asymmetric response of volatility to market movements. With the anticipated growth of the Nepalese stock market and increasing investor interest in it, it is essential to understand the pattern of stock market volatility. This paper investigates the volatility of the Nepalese stock market by modeling daily return series consisting of 1297 observations from July 2003 to Feb 2009 using various estimators and volatility models. The results suggest that the most appropriate model for volatility modeling in the Nepalese market, where no significant asymmetry in the conditional volatility of returns was detected, is GARCH(1,1). The study reveals strong evidence of time-varying volatility, a tendency for periods of high and low volatility to cluster, and a high level of persistence and predictability of volatility in the Nepalese stock market.

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