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Diagnosing The Conditional Dependence Between Returns And Risk With Vector Autoregressive Model During Covid Crisis


Affiliations
1 Research scholar, Jamal Institute of Management, Jamal Mohamed College (Affiliated to Bharathidasan University) Trichy – 620 020, India
2 Associate Professor, Jamal Institute of Management, Jamal Mohamed College Affiliated to Bharathidasan University Tiruchirappalli 620 020, India
 

Introduction: This paper proposed two separate tests for checking the conditional dependence between returns and risk of selected securities using Vector Autoregressive (VAR) model. Methodology: The proposed first test is based on Special Wald’s F-statistic. This test was employed in order to check whether the expected returns conditionally depend on risk and past year returns if the returns follow normal distribution. Similarly, in order to scrutinize the conditional dependence of risk on return and past years risk, the second test based on Lagrange’s multiplier (LM) statistic was employed. The methodology consists to model the data over the security returns of selected 5 companies under FMCG Industry listed in National Stock Exchange (NSE), India over the period between Jan 1, 2020 to Dec 31, 2020. Results: From the result of the study, it is revealed that even though the stock liquidity of Britannia and Marico is good, their expected returns reveals that this was not a deciding factor on their past year risk and return during the period of the study. And also Nestle and ITC proved to be their risk has an influence over their past risk and past returns.

Keywords

returns, risk, conditional dependence, autoregression, vector autoregression, heteroscedasticity, Special Wald test, Lagrange’s multiplier test
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  • Diagnosing The Conditional Dependence Between Returns And Risk With Vector Autoregressive Model During Covid Crisis

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Authors

W. Samuel
Research scholar, Jamal Institute of Management, Jamal Mohamed College (Affiliated to Bharathidasan University) Trichy – 620 020, India
G.S. David Sam Jayakumar
Associate Professor, Jamal Institute of Management, Jamal Mohamed College Affiliated to Bharathidasan University Tiruchirappalli 620 020, India

Abstract


Introduction: This paper proposed two separate tests for checking the conditional dependence between returns and risk of selected securities using Vector Autoregressive (VAR) model. Methodology: The proposed first test is based on Special Wald’s F-statistic. This test was employed in order to check whether the expected returns conditionally depend on risk and past year returns if the returns follow normal distribution. Similarly, in order to scrutinize the conditional dependence of risk on return and past years risk, the second test based on Lagrange’s multiplier (LM) statistic was employed. The methodology consists to model the data over the security returns of selected 5 companies under FMCG Industry listed in National Stock Exchange (NSE), India over the period between Jan 1, 2020 to Dec 31, 2020. Results: From the result of the study, it is revealed that even though the stock liquidity of Britannia and Marico is good, their expected returns reveals that this was not a deciding factor on their past year risk and return during the period of the study. And also Nestle and ITC proved to be their risk has an influence over their past risk and past returns.

Keywords


returns, risk, conditional dependence, autoregression, vector autoregression, heteroscedasticity, Special Wald test, Lagrange’s multiplier test

References





DOI: https://doi.org/10.23862/kiit-parikalpana%2F2022%2Fv18%2Fi2%2F216384