This research study examines the stochastic behaviour of stock returns in the Pakistan stock exchange (PSX) using the KSE 100 index daily return data from 2011 to 2016. Methodology is based on ARCH family of models such as ARCH, GARCH, GARCH-M EGARCH, EGARCH-M and TARCH/GJR GARCH. These specifications have been used to model the stochastic behaviour of stock return in the Pakistan stock exchange. The most appropriate model is selected on the basis of SIC and AIC selection criteria. Diagnostic checking includes ARCH-LM test and Ljung-Box Q-Statistics. This research study concludes that EGARCH (1, 1) specification explains the stochastic behaviour of the Pakistan stock exchange better than other models undertaken. The results of the study have well-grounded policy implications for market regulators, policy makers and investors.
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