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Financial Liberalisation and Breaks in Stock Market Volatility

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  • Panicos Demetriades
  • Michail Karoglou
  • Siong Hook Law

Abstract

This paper proposes a new statistical procedure which aims at providing robust estimates of volatility around official liberalisation dates, by using data driven techniques to identify the number and timing of structural breaks in the variance dynamics of stock market returns. The paper illustrates the usefulness of the procedure by providing an empirical application that focuses on five East Asian emerging markets, all of which liberalised their financial markets in the late 1980s or early 1990s, namely (South) Korea, Malaysia, Philippines, Taiwan and Thailand. It is shown that (i) the detected breakdates in the volatility of stock market returns do not correspond to official liberalisation dates and (ii) the use of official liberalisation dates as breakdates is likely to result in inaccurate inference. By using data driven techniques to detect multiple structural changes a richer - and inevitably more accurate - pattern of volatility dynamics emerges in comparison to focussing on official liberalisation dates.

Suggested Citation

  • Panicos Demetriades & Michail Karoglou & Siong Hook Law, 2006. "Financial Liberalisation and Breaks in Stock Market Volatility," Discussion Papers in Economics 06/13, Division of Economics, School of Business, University of Leicester, revised Nov 2006.
    • Handle: RePEc:lec:leecon:06/13
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    File URL: https://www.le.ac.uk/economics/research/RePEc/lec/leecon/dp06-13.pdf
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    References listed on IDEAS

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    1. De Santis, Giorgio & imrohoroglu, Selahattin, 1997. "Stock returns and volatility in emerging financial markets," Journal of International Money and Finance, Elsevier, vol. 16(4), pages 561-579, August.
    2. Andreu Sansó & Vicent Aragó & Josep Lluís Carrion, 2003. "Testing for Changes in the Unconditional Variance of Financial Time Series," DEA Working Papers 5, Universitat de les Illes Balears, Departament d'Economía Aplicada.
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    Cited by:

    1. Gregory James & Michail Karoglou, 2009. "Financial Liberalisation and Stock Market Volatility: The Case of Indonesia," Discussion Paper Series 2009_11, Department of Economics, Loughborough University, revised Sep 2009.

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