Do Dynamic Properties of Stock Return Vary Under Hostile Environment? A Study During and After the Ethnic Conflict in Sri Lanka

Investors' choice in investment is affected by a number of factors such as natural disasters, ethnic conflicts, war, political instability, economic recessions etc. Therefore, socioeconomic stability is important in building trust among investors. Nearly three decade-long ethnic conflict in Sri Lanka during 1983 to 2009 may have influenced the investment environment. Several researchers have already examined the dynamic properties of stock return in Sri Lanka. However, those findings are not consistent when there is an impact from ethnic conflict. Therefore, this study aimed to investigate the behavioural patterns of volatility clustering, asymmetric effect and leptokurtic condition of the return during and after the ethnic conflict. Similarly, risk-return trade-off condition is also tested. Daily observations of All Share Price Index from 1985 to 2012 are categorized into conflict period and post-conflict period. While GARCH (m, s) model is employed for volatility clustering, both TGARCH and EGARCH models are applied for testing the Asymmetric effect. Descriptive statistics and GARCH (M) model are used to assess the leptokurtic condition and risk-return trade-off respectively. The study found that volatility clustering existed for the conflict periods' return as well as for the post-conflict periods' return. However, it was relatively higher during the conflict period. Moreover, the research found that asymmetric effect was more critical for the post-conflict periods' return. Irrespective of the ethnic conflict, stock return has satisfied the leptokurtic condition and positive relationship between risk and return