Modelling volatility during the current financial crisis: an empirical analysis of the US and the UK stock markets

The overarching aim of the present paper is to investigate the pattern of returns and volatility in the US and the UK stock markets prior and subsequent to the current financial crisis. For that reason, the family of GARCH models is utilised; specifically, GARCH, GARCH in Mean, threshold GARCH and exponential GARCH specifications are applied on daily data from July 2004 to April 2009. The advanced fitness of TGARCH specifications after the crisis outbreak indicates significant asymmetric behaviour and increased nervousness and uncertainty in both markets. Indeed, the financial crisis forms a risky environment where the effects of shocks are more persistent. However, contradictive empirical findings arise for the required risk premium between the examined capital markets, although it would be expected that higher risk is compensated with additional returns.