Abstract: “This study examines different volatility models to capture the stock market volatility in two emerging markets Indonesia and Sri Lanka. Further the relationship between volatility and risk premium in both markets are analyzed to test the risk return trade off in those markets. GARCH, EGARCH and TGARCH models are used to capture the volatility and GARCH-M model is used to analyze the risk return relationship. In both markets it is observed that volatility clustering, leverage effect and nonlinear effect are significant by considering daily ASPI return observations from 2004 to 2013. Relationship between volatility and risk premium is not significant according to the GARCH-M model.”

Keywords: Volatility, Risk Premium, GARCH, EGARCH, TGARCH, GARCH-M, Nonlinear, Leverage