The relationship between stock returns and volatility in the Philippine stock market: A semi-parametric approach

• Main Author: Tomaliwan, Maria Francesca D.
• Format: text
• Published: Animo Repository 2015
• Subjects: Stock exchanges—Philippines; Economics—Philippines—Statistical methods; Econometrics; Economics; Social and Behavioral Sciences
• Online Access: https://animorepository.dlsu.edu.ph/faculty_research/12444
• Institution: De La Salle University

This paper studied the relationship between stock market returns and conditional volatility (variance) in the Philippine Stock Exchange Composite Index (PSEi). Empirical results in the literature are mixed relating to the sign of the risk-return trade-off. Most asset-pricing models (e.g., Sharpe, 1964; Linter, 1965; Mossin, 1966; Merton, 1973) show a positive relationship of expected returns and volatility which means more risk, more return. More recent studies implicate a negative relationship between returns and volatility such as Black (1976), Cox andRoss (1976), Bekaert and Wu (2000), Whitelaw (2000), Li et al.(2005) and Dimitrios and Theodore (2011). Based on parametric GARCH- in Mean models, Hofileña and Tomaliwan (2013)found a similar existence of a negative yet weak relationship between stock returns and conditional volatility. The insignificant relationship was seen to be caused by the parametric conditional variance modelling, which suffered from misspecification problems and thereby, yielded misleading statistical inferences.So by deviating away from parametric modelling, I applied aflexible semiparametric specification for the conditional variance and found evidence of a significant positive relationship between returns and volatility of the PSEi‟s weekly Wednesday returns from January 5, 2000 to December 23, 2013. The findings of the study are in line with the recent positive events happening in the Philippine Stock Exchange such as the launching of the country‟s first Exchange Traded Funds (ETFs).