Volatility and co-movement: an analysis of stock markets behavior of selected emerging and developed countries

Sarod Khandaker () and Silvia Zia Islam ()
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Silvia Zia Islam: Swinburne University of Technology, Australia

Journal of Developing Areas, 2015, vol. 49, issue 6, 333-347

Abstract: Financial markets around the world suffer significantly during the GFC and European debt crisis. Although the GFC is over, but the after-effect is still visible in most of the developed and emerging countries and stock markets remained volatile. In this paper, we analyse historical stock market volatility and co-movement behavior of three emerging markets and three developed economies from January 2001 to December 2012. We investigate whether the stock market volatilities and co-movement behaviors are correlated and affected by the GFC during the observation period. Our analysis of stock market behavior and co-movement analysis includes the standard historical volatility model and R-square estimates. We use the standard historical volatility model followed by Jones et al. (1998), Andersen and Bollerslev (1997) and Andersen and Bollerslev (1998); and the R-square metrics were suggested by Morck et al. (2000), Khandaker and Heaney (2009) and Alves et al. (2010). The selection criteria for the developed economies include geographical location, availability of stock return data and size of the equity market; and emerging markets are taken from the emerging Asian markets based on their recent market performance, growth rate and market capitalisation. We find evidence that the sample of emerging markets, exhibits higher stock market volatility during the sample period and these volatilities increases during the GFC. There is also evidence that the sample emerging countries exhibit a higher level of stock market co-movement behavior, and these markets were highly synchronous during the GFC. For example, China exhibits higher stock return co-movement behavior and, this behavior increase during the GFC. Further, we do not find any evidence of a statistically significant correlation coefficient between the volatility measures and stock return co-movement measures for our sample developed countries. However, these measures are statistically significant for the emerging country group. The example includes China and Malaysia. Our result provides evidence that stock market co-movement behavior or the R-squared matrix captures somewhat different aspects of stock market behavior other than the stock market volatility for the developed economies. Therefore, it is concluded that both these market models capture somewhat different aspects of stock market behavior and should be carefully used.

Keywords: Historical volatility; Co-movement; GFC (search for similar items in EconPapers)
JEL-codes: G14 G15 (search for similar items in EconPapers)
Date: 2015
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