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Global Financial Crises and Time-varying Volatility Comovement in World Equity Markets

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  • Andrew Stuart Duncan
  • Alain Kabundi

Abstract

This paper studies volatility comovement in world equity markets between 1994 and 2008. Global volatility factors are extracted from a panel of monthly volatility proxies relating to 25 developed and 20 emerging stock markets. A dynamic factor model (FM) is estimated using two-year rolling window regressions. The FMÂ’s time-varying variance shares of global factors map variations in volatility comovement over time and across countries. The results indicate that global volatility linkages are particularly strong during Â…nancial crises in Asia (1997-8), Russia (1998), and the United States (2007-8). Emerging markets are less syncrhonised with world volatility than are developed markets. In particular, we observe decoupling between emerging and world volatilities between 2001 and 2007. Recoupling occurs during 2008, thus identifying emerging market investments as a temporary hedge against volatility spillovers from the US subprime crisis.

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Bibliographic Info

Paper provided by Economic Research Southern Africa in its series Working Papers with number 253.

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Length: 32 pages
Date of creation: 2011
Date of revision:
Handle: RePEc:rza:wpaper:253

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Keywords: Asset Market Linkages; Dynamic Factor Model; Financial Crisis; International DiversiÂ…cation; Volatility Comovement;

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Cited by:
  1. Duncan, Andrew S. & Kabundi, Alain, 2013. "Domestic and foreign sources of volatility spillover to South African asset classes," Economic Modelling, Elsevier, Elsevier, vol. 31(C), pages 566-573.

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