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Stochastic volatility and time-varying country risk in emerging markets

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Author Info

  • Anders Johansson

Abstract

This study suggests an alternative method to estimate time-varying country risk. We first apply a new multivariate stochastic volatility (SV) model to a set of emerging stock markets. To estimate the SV model, we use a Bayesian Markov chain Monte Carlo simulation procedure. By applying the deviance information criterion, we show that the new model performs well relative to alternative multivariate SV models. We then compute the conditional betas for the different markets and compare the results with an often-used procedure based on multivariate GARCH models. We show that the new multivariate SV model more accurately captures the time-varying nature of country risk. The conditional betas show signs of large variations, indicating the importance of taking time-varying country risk into consideration when managing emerging market portfolios.

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File URL: http://www.tandfonline.com/doi/abs/10.1080/13518470802466006
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Bibliographic Info

Article provided by Taylor & Francis Journals in its journal The European Journal of Finance.

Volume (Year): 15 (2009)
Issue (Month): 3 ()
Pages: 337-363

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Handle: RePEc:taf:eurjfi:v:15:y:2009:i:3:p:337-363

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Web page: http://www.tandfonline.com/REJF20

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Related research

Keywords: conditional beta; multivariate stochastic volatility; Markov chain Monte Carlo; emerging markets;

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Cited by:
  1. Jaramillo, Laura & Weber, Anke, 2013. "Bond yields in emerging economies: It matters what state you are in," Emerging Markets Review, Elsevier, vol. 17(C), pages 169-185.
  2. Johansson, Anders C., 2010. "Asian sovereign debt and country risk," Pacific-Basin Finance Journal, Elsevier, vol. 18(4), pages 335-350, September.
  3. Yang, Hsin-Feng & Liu, Chih-Liang & Chou, Ray Yeutien, 2014. "Interest rate risk propagation: Evidence from the credit crunch," The North American Journal of Economics and Finance, Elsevier, vol. 28(C), pages 242-264.
  4. Johansson, Anders C., 2009. "An Analysis Of Dynamic Risk In The Greater China Equity Markets," Working Paper Series 2009-5, China Economic Research Center, Stockholm School of Economics.
  5. Chevapatrakul, Thanaset, 2013. "Return sign forecasts based on conditional risk: Evidence from the UK stock market index," Journal of Banking & Finance, Elsevier, vol. 37(7), pages 2342-2353.
  6. Pop, Raluca Elena, 2012. "Herd behavior towards the market index: evidence from Romanian stock exchange," MPRA Paper 51595, University Library of Munich, Germany.
  7. Laura Jaramillo & Anke Weber, 2012. "Bond Yields in Emerging Economies," IMF Working Papers 12/198, International Monetary Fund.
  8. Johansson, Anders C., 2010. "Stock and Bond Relationships in Asia," Working Paper Series 2010-14, China Economic Research Center, Stockholm School of Economics.

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