Volatility and Co-Movement: An Analysis of Stock Markets Behavior of Selected Emerging and Developed Countries

By Khandaker, Sarod; Islam, Silvia Zia | The Journal of Developing Areas, January 1, 2015 | Go to article overview

Volatility and Co-Movement: An Analysis of Stock Markets Behavior of Selected Emerging and Developed Countries


Khandaker, Sarod, Islam, Silvia Zia, The Journal of Developing Areas


(ProQuest: ... denotes formulae omitted.)

INTRODUCTION

Financial markets around the world suffered significantly during the Global Financial Crisis (GFC). Although the GFC is over in late 2010, the after-effects of the GFC are still visible and most developed and emerging economies are still suffering from the post GFC crisis. In the midst of the current credit crunch in financial markets, we have also seen the sovereign debt crisis in Europe and a number of European economies go through enormous structural change (Constancio 2011, Alter and Schüler 2011, Zhang et al. 2011). The World Bank also expressed its deep concern about this crisis and warned that a second crisis could be coming which might be more devastating in nature. Therefore, how the developed and emerging stock markets reacted to this crisis is a matter of considerable interest.

The focus of our study is to analyse the behavior of stock markets during the GFC in terms of historical stock market volatility and co-movement in stock returns. We also investigate whether the stock market volatilities and co-movement behaviors are correlated and affected by the Global stock markets. The study uses two different statistical models in order to analyse the stock market volatility and co-movement behavior. The first model used in this study is the standard historical volatility model followed by Jones et al. (1998), Andersen and Bollerslev (1997) and Andersen and Bollerslev (1998); the second model is the stock market co-movement measures or the R-square metrics suggested by Alves et al. (2010), Khandaker and Heaney (2009) and Morck et al. (2000).

Our results find evidence that stock markets around the world were volatile during the GFC. There is also evidence that some of our sample stock markets exhibit higher R-square values during the study period suggesting higher stock return co-movement behavior. The stock market time-series variables are stationary over the study period for most of our sample countries and there is evidence of a positive correlation coefficient between the samples of developed countries' stock markets. However, our research could not find evidence of a statistically significant correlation coefficient between the stock market's volatility and co-movement measures for the sample stock exchanges, except for Indonesia.

This article is divided as follows: The second section reviews some major literature on stock market volatility and co-movement behavior. Section three and four discuss the data and research methodology. The Fifth section focuses on stock market analysis and results obtained from the statistical analysis. In the final section, concluding remarks has been presented with a brief discussion.

LITERATURE REVIEW

Market Volatility Analysis

The expected future volatility of financial market returns is the main element in assessing asset or portfolio risk and plays a key role in derivatives pricing models. It is difficult to extract a coherent set of prescriptions concerning the most appropriate empirical procedure for volatility forecasting from the existing literature. However, researchers argue that the daily fluctuations in stock returns are vastly affected by macroeconomic announcements. For example, Bomfim (2003) found evidence that the US stock returns respond reliably to macroeconomic announcements and government monetary policy. He argues that the decisions regarding the target federal funds rate can influence market volatility in the United States.

There is also evidence in the academic literature that pre-announcements affect the stock market behavior. For example, Jones et al. (1998), Li and Engle (1998), French et al. (1989) and Dasilas and Leventis (2011) argue that the treasury securities market and, agricultural futures market greatly affects by the pre-announcement information. They find that market participants are unwilling to trade securities just ahead of the release of a significant piece of information in order to secure their profit. …

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