Abstract:
Entire Macroeconomic system is adversely affected by an ethnic problem in a country. Experiences of nearly
three decades Civil War in Sri Lanka have exposed a continuous economic recession with depressing the
reliability of equity investments in the capital market. Stock return volatility is one of the measures of risk
of equity investments and degree of volatility is affected by the economic instability of the country. The core
objectives of the current study is to scrutinize the differences of Volatility Clustering (Persistence of shocks
prevail for longer periods) and Asymmetric Effect (Bad news create more volatility than good news) of the
return series during and after the Civil War derived from All Share Price Index of Colombo Stock Exchange.
Daily observations of ASPI from 1985 to 2012 have been considered by dividing it in to war period and postwar
period. Meanwhile it was investigated Leptokurtic and Risk-return Trade-off conditions of both series.
While GARCH (m, s) model was employed for volatility clustering, both TGARCH and EGARCH models
were applied for testing the Asymmetric Effect of the series. Tools in descriptive statistics, and GARCH (M)
model were for observing the Leptokurtic condition and Risk-return Trade-off respectively. Eventually study
found that the existence of volatility clustering for both war period’s return and post-war periods’ return.
However it is relatively higher in the war period’s return. It was further revealed that the Asymmetric effect
is more critical for the post-war period’s return. This indicates that during the period of war, bad news
have been more typical. Both return series have satisfied the Leptokurtic condition. Even though there is a
positive relationship between risk and return for both series they are not significant in the GARCH (1, 1)-M
model.
