The effects of anticipated and unanticipated stock return volatility on stock return of Automobile manufacturing industries in Tehran Stock Market

According to volatility feedback theory there are relationships between stock return and the risk of stock. However, the results of empirical research, in several countries and markets, are different. This study investigates the effect of anticipated stock return volatility on stock return in Automobile industry using GARCH in Mean (GARCH-M) models, and ARDL modeling and Bounds test approach to level relationship. We also investigate the effect of unanticipated stock return volatility on stock return using ARDL model and Bounds test approach in the period of 06/04/1998 - 06/07/2010, applying daily and weekly Automobile industry index in Tehran Stock Exchange. Estimation of the GARCH-M model results by applying FIML method of estimation show that anticipated stock return volatility affects the stock return positively. Moreover, Bounds test approach results from both models confirm existence of long-run relationship among variables under investigation at 1% significance level. The ARDL estimation results show that anticipated (unanticipated) volatility of Automobile industry stock return increases (decreases) the return in long-run. Results from Granger causality test confirms one-way long-run causation from anticipated volatility of Automobile industry stock return to the return.