Nonlinear dynamics: Evidence for a small stock exchange

This paper models the main stock index of the Vienna Stock Exchange with daily data from 1986 to 1992. We find that returns are nonnormal and show linear and nonliner dependence. On that basis we compare the fit of alternative specifications of Generalized Autoregressive Conditional Heteroscedasticity (GARCH) to the Markov-Switching approach. The models are evaluated with diagnostic tests on the standardized residuals. We consider evidence for deterministic structures and for infinite variance. Our main result is that a parsimonious model from the GARCH – class can generate the statistical properties of daily returns. The behavior of the two types of models with respect to temporal aggregation is found to differ significantly. First version received: January 1996/Final version received: December 1997