Stock market liberalization, structural breaks and dynamic changes in emerging market volatility

Duc Khuong Nguyen and Mondher Bellalah

Review of Accounting and Finance, 2008, vol. 7, issue 4, 396-411

Abstract: Purpose - This paper aims to empirically reexamine the dynamic changes in emerging market volatility around stock market liberalization. Design/methodology/approach - First, a bivariate GARCH‐M model which counts for partial market integration is developed for modeling stock market volatility in emerging market countries. Second, the Bai and Perron stability test in a linear framework and a pooled time‐series cross‐section model were employed to examine the empirical relationship between stock market liberalization and volatility. Findings - Structural breaks detected in emerging market volatility series did not take place at the time of official liberalization dates, but they rather coincide with alternative events of liberalization process. The effects of official liberalization on return volatility are on average insignificant. The stock return volatility is however lowered when the participation of the US investors becomes effective and important on emerging markets, and when emerging markets increase in size. Research limitations/implications - The study assumes a static degree of market integration. Future research should extend our model by using a time‐varying measure of market integration. Practical implications - Policymakers in frontier markets should open up local stock markets to attract foreign investments and to allow local firms to benefit from international risk sharing. Also, the gradual embankment of market‐liberalization is necessary to gain investors' confidence and to prevent the harmful effects of foreign capital flows. Originality/value - The consideration of alternative events of liberalization process and the use of a powerful stability test to examine the time‐series properties of conditional volatilities.

Keywords: Stock markets; Time‐series analysis; Stock returns; Emerging markets (search for similar items in EconPapers)
Date: 2008
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Citations: View citations in EconPapers (4)

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Persistent link: https://EconPapers.repec.org/RePEc:eme:rafpps:v:7:y:2008:i:4:p:396-411

DOI: 10.1108/14757700810920784

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