Wonder Bars Cost of Capital or Required Return

Theoretical and Applied Economics Volume XVIII (2011), No. 2(555), pp. 75-88

Portfolio Risk Analysis using ARCH and GARCH Models in the Context of the Global Financial Crisis*
Oana Mădălina PREDESCU Bucharest Academy of Economic Studies [e-mail] Stelian STANCU Bucharest Academy of Economic Studies [e-mail] Abstract. This paper examines both the benefits of choosing an internationally diversified portfolio and the evolution of the portfolio risk in the context of the current global financial crisis. The portfolio is comprised of three benchmark indexes from Romania, UK and USA. Study results show that on the background of a global economic climate eroded strongly by the effects of the current financial crisis, international diversification does not reduce risk. Moreover, using ARCH and GARCH models shows that the evolution of portfolio volatility is influenced by the effects of the current global financial crisis. Keywords: global financial crisis; diversification; volatility; ARCH model; GARCH model. JEL Code: G01. REL Code: 11B.

Ideas in this article were presented at the Symposium „The global crisis and reconstruction of economics?”, 5-6 November 2010, Faculty of Economics, Bucharest Academy of Economic Studies.

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Oana Mădălina Predescu, Stelian Stancu

1. Introduction The sub-prime credit problem that started in the United States during 2007 affected the financial sector in other countries, especially Europe. Deterioration of this sector led to the collapse of national financial systems in different parts of the world, the result being a severe global financial crisis. The magnitude of the recent financial crisis is considered to have no precedent since the Great Depression, the International Monetary Fund (IMF) referring to this global recession as “The Great Recession”. A study developed by the IMF in 2009 stated that the recent financial crisis has “revealed important flaws in the current global

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