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A COMPARATIVE ANALYSIS BETWEEN THE NIKKEI 225 AND THE TOPIX INDICES, THE MOST IMPORTANT STOCK MARKET INDICES FOR THE TOKYO STOCK EXCHANGE
Abstract
The purpose of the research is to compare the main two important stock market indices for the Tokyo Stock Exchange: the Nikkei Stock Average Index (NIKKEI 225) and the Tokyo Stock Price Index (TOPIX), both from the composition, calculation methodology and base value, but also taking into account the changes in volatility using the asymmetric Generalized Autoregressive Conditionally Heteroscedastic processes. The paper tracks the application of time series analysis in financial markets. To do this, I chose the Tokyo Stock Exchange because it is the largest stock exchange in Japan, and together with the London Stock Exchange and the New-York Stock Exchange gives the most important international indices. Since the area of empirical research in financial markets has become a very important topic over the last few decades, the importance of this paper is given not only by the central concept in financial analysis represented by volatility measured as conditional variance, which is not directly observable, but also by the most delicate field of econometrics represented by time series. Generally, an index is both a statistical indicator that reflects market evolution over time, but also a benchmark reflecting the asset management performance. So, stock price indices have become indispensable in the investment decisions field. It comes as no surprise that the analyzed indices have their advantages and disadvantages, since the calculation methods have a distinct approach regarding the stock market capitalization, fact that leads to the choice of TOPIX Index in Japanese asset management instead of NIKKEI 225 Index. As respects volatility, the empirical results show that in both cases the best process for estimating volatility is EGARCH(1,1), but the distributions are different (for NIKKEI 225 - the Students t distribution with fixed degrees of freedom, while for TOPIX - GED with fixed parameter).
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http://indexes.nikkei.co.jp/en/nkave/archives/summary.
http://www.jpx.co.jp/english/markets/indices/topix/index.html.
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