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Volatility and Links between National Stock Markets

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Author Info
King, Mervyn
Sentana, Enrique
Wadhwani, Sushil

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Abstract

The authors attempt to account for the covariances between stock markets and to assess their integration. They estimate a factor model for sixteen national stock market returns whose volatility is induced by changing volatility in the factors. Unanticipated returns depend on innovations in economic variables and 'unobservable' factors. Assets risk premia are linear combinations of the factors risk premia. The authors find that idiosyncratic risk is priced and the 'price of risk' is different across stock markets. Besides, only a small proportion of their covariances can be accounted for by 'observable' economic variables. Correlation changes are driven primarily by movements in 'unobservables.' Copyright 1994 by The Econometric Society.

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Publisher Info
Article provided by Econometric Society in its journal Econometrica.

Volume (Year): 62 (1994)
Issue (Month): 4 (July)
Pages: 901-33
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Handle: RePEc:ecm:emetrp:v:62:y:1994:i:4:p:901-33

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Fama, Eugene F. & Schwert, G. William, 1977. "Asset returns and inflation," Journal of Financial Economics, Elsevier, vol. 5(2), pages 115-146, November. [Downloadable!] (restricted)
  2. Harvey, Andrew & Ruiz, Esther & Sentana, Enrique, 1992. "Unobserved component time series models with Arch disturbances," Journal of Econometrics, Elsevier, vol. 52(1-2), pages 129-157. [Downloadable!] (restricted)
  3. Roll, R., 1989. "Price Volatility, International Market Links, And Their Implications For Regulatory Policies," Papers t10, Columbia - Center for Futures Markets.
  4. French, Kenneth R. & Schwert, G. William & Stambaugh, Robert F., 1987. "Expected stock returns and volatility," Journal of Financial Economics, Elsevier, vol. 19(1), pages 3-29, September. [Downloadable!] (restricted)
  5. Robert F. Engle & Victor Ng & Michael Rothschild, 1988. "Asset Pricing with a Factor Arch Covariance Structure: Empirical Estimates for Treasury Bills," NBER Technical Working Papers 0065, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  6. King, Mervyn A & Wadhwani, Sushil, 1990. "Transmission of Volatility between Stock Markets," Review of Financial Studies, Oxford University Press for Society for Financial Studies, vol. 3(1), pages 5-33. [Downloadable!] (restricted)
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  7. Sentana, E., 1994. "The Likelihood Function of a Conditionally Heteroskdastic Factor Model with Heywood Cases," Papers 9420, Centro de Estudios Monetarios Y Financieros-.
  8. Gultekin, Mustafa N & Gultekin, N Bulent & Penati, Alessandro, 1989. " Capital Controls and International Capital Market Segmentation: The Evidence from the Japanese and American Stock Markets," Journal of Finance, American Finance Association, vol. 44(4), pages 849-69, September. [Downloadable!] (restricted)
  9. Pagan, Adrian & Ullah, Aman, 1988. "The Econometric Analysis of Models with Risk Terms," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 3(2), pages 87-105, April. [Downloadable!] (restricted)
  10. Fama, Eugene F. & French, Kenneth R., 1988. "Dividend yields and expected stock returns," Journal of Financial Economics, Elsevier, vol. 22(1), pages 3-25, October. [Downloadable!] (restricted)
  11. Poterba, James M & Summers, Lawrence H, 1986. "The Persistence of Volatility and Stock Market Fluctuations," American Economic Review, American Economic Association, vol. 76(5), pages 1142-51, December. [Downloadable!] (restricted)
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  12. George M. von Furstenberg & Bang Nam Jeon, 1989. "International Stock Price Movements: Links and Messages," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 20(1989-1), pages 125-180. [Downloadable!]
  13. Grossman, Sanford J & Shiller, Robert J, 1981. "The Determinants of the Variability of Stock Market Prices," American Economic Review, American Economic Association, vol. 71(2), pages 222-27, May. [Downloadable!] (restricted)
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  14. Burmeister, Edwin & McElroy, Marjorie B, 1988. " Joint Estimation of Factor Sensitivities and Risk Premia for the Arbitrage Pricing Theory," Journal of Finance, American Finance Association, vol. 43(3), pages 721-33, July. [Downloadable!] (restricted)
  15. Jarque, Carlos M. & Bera, Anil K., 1980. "Efficient tests for normality, homoscedasticity and serial independence of regression residuals," Economics Letters, Elsevier, vol. 6(3), pages 255-259. [Downloadable!] (restricted)
  16. Diebold, Francis X & Nerlove, Marc, 1989. "The Dynamics of Exchange Rate Volatility: A Multivariate Latent Factor Arch Model," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 4(1), pages 1-21, Jan.-Mar.. [Downloadable!] (restricted)
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  17. Avanidhar Subrahmanyam, 1989. "Price Volatility, International Market Links and their Implications for Regulatory Policies," University of California at Los Angeles, Anderson Graduate School of Management 1188, Anderson Graduate School of Management, UCLA. [Downloadable!]
  18. Robert Jennrich, 1978. "Rotational equivalence of factor loading matrices with specified values," Psychometrika, Springer, vol. 43(3), pages 421-426, September. [Downloadable!] (restricted)
  19. James Dunn, 1973. "A note on a sufficiency condition for uniqueness of a restricted factor matrix," Psychometrika, Springer, vol. 38(1), pages 141-143, March. [Downloadable!] (restricted)
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