This paper develops a new GARCHfamily model (named LiquidityWeighted GARCH or LWGARCH) for explaining the volatility behaviour of financial time series, with an application on empirical international equity series (consisting both of stock market indices and individual stock returns). The dataset consists of daily stock market indexes and individual stocks closing prices (12 series) from international stock markets, both developed (USA, Japan, Western Europe) and posttransition CEE stock markets and the sample period extends from January 2, 2001 to February 19, 2008. Further, three different time intervals are delineated to comparatively estimate and compare the accuracy of three volatility models in explaining the conditional volatility of the empirical equity series, i.e. GARCH (1,1), EGARCH (1,1) and the newly developed LWGARCH. We find that the LW GARCH model generally performs better in explaining conditional volatility than the other two models (higher values for the loglikelihood function and lower values for the BIC information criterion). In addition, we notice that the exogenous factor in the conditional variance equation has a higher explanatory power in the more recent analysis period, therefore the influence of the explanatory factor (the S&P500) has increased in recent years, so that the more recent is the time period used in the estimation, the better the LWGARCH performs comparatively to other volatility models. conditional volatility, LiquidityWeighted GARCH, Granger causality test, empirical equity returns, ARCHLM test I. INTRODUCTION T he subject of volatility has always been one of great interest for participants in financial markets, for researchers and even for the general public, often being associated by the latter with the notion of risk. In the current context of an ongoing global financial crisis, terms like volatility forecasting or risk management are nowadays the most important topics in the financial world. In addition, the importance of stock markets in developing Central and Eastern European countries is increasing at an 1 Cristiana Tudor, Senior Lecturer, PhD is with the International Business and Economics Department from the Bucharest Academy of Economic Studies, Romana Square No 6, Bucharest, Romania (phone: +40723254342, email: cristianat@ gmail.com). This work was supported by CNCSISUEFISCU, Project number PN II RU 662/2010, Director Dr. Cristiana Tudor accelerating pace, providing new opportunities and threats to market participants. The development of equities markets in these countries has been closely linked to the privatization process. [21] shows that stock markets developed quite quickly initially in countries where mass privatization schemes were initiated (Czech and Slovak Republics (1992), followed by Bulgaria, Lithuania, FYR Macedonia, Moldova, and Romania). The basic feature of this first group of markets was the transfer among investors of ownership rights to massprivatized companies. At first these markets listed a large number of stocks, many of which were illiquid. But once the markets became more established, through transactions at stock exchanges, the number of stockholders fell and ownership became more concentrated. This approach proved to be more successful than others, which is reflected in higher liquidity and better performance of stock indices in selected countries. The second category of Central and Eastern European countries is comprised by Croatia, Estonia, Hungary, Latvia, Poland, and Slovenia. These countries established their capital markets with a small number of companies which offered their stocks to investors through IPOs. Table 1 summarizes the origins of equity markets in Central and Eastern Europe: Table 1: The origins of equity markets in Central and Eastern Europe Bulgaria Croatia Armenia Czech Republic Estonia Azerbaijan FYR Macedonia Hungary Kazakhstan Lithuania Latvia Kyrgyz Republic Moldova Poland* Poland* Romania Slovenia Russia Slovak Republic Ukraine Uzbekistan Note: *Poland also had mandatory listings of mass privatized companies and National Investment Funds after 1996. Source: [9] Empirical research on emerging markets characteristics has A LiquidityWeighted GARCH model for empirical equity series Cristiana Tudor Recent Researches in Applied Mathematics, Simulation and Modelling ISBN: 978-1-61804-016-9 134