The Empirical And Model Of Financial Market's Volatility

Volatility has been playing an important role in pricing derivatives,portfolio risk management and option hedging strategy. In modern financial theory, volatility is widely used to represent risk and is always measured as the variance of return. Variance is supposed to be constant in the traditional econometric model.But with the development of new research, the hypothesis is proved to be improper. Many empirical researches in financial data showed that variance is changeable with time varying. ARCH model had been applied in the research of volatility of stock market by foreigners. Also, domestic scholars establish ARCH model in analysis of the volatility of Shanghai composite index and Shenzhen component index to test the efficiency of Chinese stock market and the volatility's character.Although only a little financial derivatives appeared in domestic capital market. The index fund has developed for a period of time. Such as Wanjia 180 index fund which underly Shanghai 180 index and ShenZheng 50 ETF (exchage traded fund)). So,to study the volatility of Shanghai 180 index and ShenZheng 100 index is practical.Basis on introducing the Black-Scholes option pricing formula, the concept of volatility is defined. The application of volatility in option pricing,risk management and hedging is also descripted. Then ARCH model is well discussed and the stochastic volatility model is introduced.The range of Shanghai 180 index is between 2002.07.01 and 2006.01.12. The range of ShenZheng 50 index is between 2003.01.02 and 2006.01.12. After analysis of the return series of the two index, ARCH effect does exist. Comparison among all the GARCH model, the EGARCH(1,1) model is proved to be the best one to simulate the character of the two return series.