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Stock returns and volatility in emerging financial markets

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  • Giorgio De Santis
  • Selahattin Imrohoroglu

Abstract

In this paper we study the dynamic behavior of stock returns and volatility in emerging financial markets. In particular, we focus our attention on the following questions: (1) Does stock return volatility in emerging markets change over time? If so, are volatility changes predictable? (2) How frequent are big surprises in emerging stock markets? (3) Is there any relationship between market risk and expected returns? (4) Has liberalization affected return volatility in emerging financial markets? ; Our findings can be summarized as follows. First, there is strong evidence of predictable time-varying volatility in almost all countries. In general, changes in volatility are highly persistent. Second, a fat-tailed distribution improves the fitting ability of the model. Third, investors are not rewarded for market-wide risk. Finally, we do not find any systematic effect of liberalization on stock market volatility.

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Bibliographic Info

Paper provided by Federal Reserve Bank of Minneapolis in its series Discussion Paper / Institute for Empirical Macroeconomics with number 93.

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Date of creation: 1994
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Handle: RePEc:fip:fedmem:93

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Keywords: Developing countries ; Stock - Prices;

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  1. Baillie, R.T. & Degennaro, R.P., 1988. "Stock Returns And Volatility," Papers 8803, Michigan State - Econometrics and Economic Theory.
  2. Tim Bollerslev, 1986. "Generalized autoregressive conditional heteroskedasticity," EERI Research Paper Series EERI RP 1986/01, Economics and Econometrics Research Institute (EERI), Brussels.
  3. Bollerslev, Tim & Chou, Ray Y. & Kroner, Kenneth F., 1992. "ARCH modeling in finance : A review of the theory and empirical evidence," Journal of Econometrics, Elsevier, vol. 52(1-2), pages 5-59.
  4. Harris, Lawrence, 1986. "Cross-Security Tests of the Mixture of Distributions Hypothesis," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 21(01), pages 39-46, March.
  5. Bekaert, Geert & Harvey, Campbell R., 1997. "Emerging equity market volatility," Journal of Financial Economics, Elsevier, vol. 43(1), pages 29-77, January.
  6. Bollerslev, Tim, 1987. "A Conditionally Heteroskedastic Time Series Model for Speculative Prices and Rates of Return," The Review of Economics and Statistics, MIT Press, vol. 69(3), pages 542-47, August.
  7. Errunza, Vihang, et al, 1994. "Conditional Heteroskedasticity and Global Stock Return Distributions," The Financial Review, Eastern Finance Association, vol. 29(3), pages 293-317, August.
  8. Benoit Mandelbrot, 1963. "The Variation of Certain Speculative Prices," The Journal of Business, University of Chicago Press, vol. 36, pages 394.
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  10. Scholes, Myron & Williams, Joseph, 1977. "Estimating betas from nonsynchronous data," Journal of Financial Economics, Elsevier, vol. 5(3), pages 309-327, December.
  11. Nelson, Daniel B., 1992. "Filtering and forecasting with misspecified ARCH models I : Getting the right variance with the wrong model," Journal of Econometrics, Elsevier, vol. 52(1-2), pages 61-90.
  12. Kraus, Alan & Litzenberger, Robert H, 1976. "Skewness Preference and the Valuation of Risk Assets," Journal of Finance, American Finance Association, vol. 31(4), pages 1085-1100, September.
  13. 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.
  14. Andrew W. Lo, A. Craig MacKinlay, 1988. "Stock Market Prices do not Follow Random Walks: Evidence from a Simple Specification Test," Review of Financial Studies, Society for Financial Studies, vol. 1(1), pages 41-66.
  15. Rene M. Stulz, 1994. "International Portfolio Choice and Asset Pricing: An Integrative Survey," NBER Working Papers 4645, National Bureau of Economic Research, Inc.
  16. Nelson, Daniel B, 1991. "Conditional Heteroskedasticity in Asset Returns: A New Approach," Econometrica, Econometric Society, vol. 59(2), pages 347-70, March.
  17. William F. Sharpe, 1964. "Capital Asset Prices: A Theory Of Market Equilibrium Under Conditions Of Risk," Journal of Finance, American Finance Association, vol. 19(3), pages 425-442, 09.
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