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Stock Market Volatility: Examining North America, Europe and Asia

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  • Gamini Premaratne
  • Lakshmi Bala

Abstract

An understanding of volatility in stock markets is important for determining the cost of capital and for assessing investment and leverage decisions as volatility is synonymous with risk. Substantial changes in volatility of financial markets are capable of having significant negative effects on risk averse investors. Using daily returns from 1992 to 2002, we investigate volatility co-movement between the Singapore stock market and the markets of US, UK, Hong Kong and Japan. In order to gauge volatility comovement, we employ econometric models of (i) Univariate GARCH (ii) Vector Autoregression and (iii) a Multivariate and Asymmetric Multivariate GARCH model with GJR extensions. The empirical results indicate that there is a high degree of volatility co-movement between Singapore stock market and that of Hong Kong, US, Japan and UK (in that order). Results support small but significant volatility spillover from Singapore into Hong Kong, Japan and US markets despite the latter three being dominant markets. Most of the previous research concludes that spillover effects are significant only from the dominant market to the smaller market and that the volatility spillover effects are unidirectional. Our study evinces that it is plausible for volatility to spill over from the smaller market to the dominant market. At a substantive level, studies on volatility co-movement and spillover provide useful information for risk analysis.

Suggested Citation

  • Gamini Premaratne & Lakshmi Bala, 2004. "Stock Market Volatility: Examining North America, Europe and Asia," Econometric Society 2004 Far Eastern Meetings 479, Econometric Society.
  • Handle: RePEc:ecm:feam04:479
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    References listed on IDEAS

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    1. G. William Schwert, 1997. "Stock Market Volatility: Ten Years After the Crash," Center for Financial Institutions Working Papers 97-51, Wharton School Center for Financial Institutions, University of Pennsylvania.
    2. Tom Engsted & Carsten Tanggaard, 2004. "The Comovement of US and UK Stock Markets," European Financial Management, European Financial Management Association, vol. 10(4), pages 593-607.
    3. Campbell, John Y. & Hentschel, Ludger, 1992. "No news is good news *1: An asymmetric model of changing volatility in stock returns," Journal of Financial Economics, Elsevier, vol. 31(3), pages 281-318, June.
    4. Nelson, Daniel B, 1991. "Conditional Heteroskedasticity in Asset Returns: A New Approach," Econometrica, Econometric Society, vol. 59(2), pages 347-370, March.
    5. Koutmos, Gregory & Booth, G Geoffrey, 1995. "Asymmetric volatility transmission in international stock markets," Journal of International Money and Finance, Elsevier, vol. 14(6), pages 747-762, December.
    6. Schwert, G William, 1989. " Why Does Stock Market Volatility Change over Time?," Journal of Finance, American Finance Association, vol. 44(5), pages 1115-1153, December.
    7. Engle, Robert F & Ng, Victor K, 1993. " Measuring and Testing the Impact of News on Volatility," Journal of Finance, American Finance Association, vol. 48(5), pages 1749-1778, December.
    8. Bekaert, Geert & Harvey, Campbell R., 1997. "Emerging equity market volatility," Journal of Financial Economics, Elsevier, vol. 43(1), pages 29-77, January.
    9. 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.
    10. Bekaert, Geert & Wu, Guojun, 2000. "Asymmetric Volatility and Risk in Equity Markets," Review of Financial Studies, Society for Financial Studies, vol. 13(1), pages 1-42.
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    Citations

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    Cited by:

    1. Abdul Hakim & Michael McAleer, 2010. "Modelling the interactions across international stock, bond and foreign exchange markets," Applied Economics, Taylor & Francis Journals, vol. 42(7), pages 825-850.
    2. Egert, Balazs & Kocenda, Evzen, 2007. "Interdependence between Eastern and Western European stock markets: Evidence from intraday data," Economic Systems, Elsevier, vol. 31(2), pages 184-203, June.
    3. Gabriel, Vítor, 2015. "Sensitivity, Persistence and Asymmetric Effects in International Stock Market Volatility during the Global Financial Crisis || Efectos de sensibilidad, persistencia y asimetría en la volatilidad de lo," Revista de Métodos Cuantitativos para la Economía y la Empresa = Journal of Quantitative Methods for Economics and Business Administration, Universidad Pablo de Olavide, Department of Quantitative Methods for Economics and Business Administration, vol. 19(1), pages 42-65, June.
    4. Singh, Priyanka & Kumar, Brajesh & Pandey, Ajay, 2010. "Price and volatility spillovers across North American, European and Asian stock markets," International Review of Financial Analysis, Elsevier, vol. 19(1), pages 55-64, January.
    5. Priyanka Singh & Brajesh Kumar & Pandey, Ajay, 2008. "Price and Volatility Spillovers across North American, European and Asian Stock Markets: With Special Focus on Indian Stock Market," IIMA Working Papers WP2008-12-04, Indian Institute of Management Ahmedabad, Research and Publication Department.
    6. Nartea, Gilbert V. & Wu, Ji, 2013. "Is there a volatility effect in the Hong Kong stock market?," Pacific-Basin Finance Journal, Elsevier, pages 119-135.
    7. Paramita Mukherjee, 2011. "An exploration on volatility across India and some developed and emerging equity markets," Asia-Pacific Development Journal, United Nations Economic and Social Commission for Asia and the Pacific (ESCAP), vol. 18(2), pages 79-103, December.
    8. Claudeci Da Silva & Hugo Agudelo Murillo & Joaquim Miguel Couto, 2014. "Early Warning Systems: Análise De Ummodelo Probit De Contágio De Crise Dos Estados Unidos Para O Brasil(2000-2010)," Anais do XL Encontro Nacional de Economia [Proceedings of the 40th Brazilian Economics Meeting] 110, ANPEC - Associação Nacional dos Centros de Pósgraduação em Economia [Brazilian Association of Graduate Programs in Economics].

    More about this item

    Keywords

    Multivariate GARCH; Volatility Spillover; comovement;

    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • F3 - International Economics - - International Finance
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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