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Time-varying return-volatility relation in international stock markets

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  • Jin, Xiaoye

Abstract

This study examines the time-varying relationship between stock returns and volatility in sixteen stock markets during January 2001 to October 2014. After estimating the volatility process without assuming any specific form of its behavior, we find the volatility to be long-term dependent with the Hurst exponent on a verge of stationarity and nonstationarity. We then apply the detrended cross-correlation coefficient to overcome this complication and find evidence of a significant and negative relationship between current stock market returns and current market volatility. Additionally, we find the strength of the negative return-volatility relation is different for specific scales and is stronger in longer time horizon. We further investigate the presence of volatility feedback and leverage effects in international stock markets by examining the lead-lag relation between stock returns and volatility and confirm that the negative return-volatility relation seems to be return-driven (the leverage effect). Finally, we examine the dynamic behavior of the return-volatility relation by applying a rolling window approach and find that time-varying negative return-volatility relation is more likely to generate an asymmetric response with a greater effect when returns decline, which is the common characteristic of international stock markets.

Suggested Citation

  • Jin, Xiaoye, 2017. "Time-varying return-volatility relation in international stock markets," International Review of Economics & Finance, Elsevier, vol. 51(C), pages 157-173.
    • Handle: RePEc:eee:reveco:v:51:y:2017:i:c:p:157-173
    DOI: 10.1016/j.iref.2017.05.015
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    More about this item

    Keywords

    Return-volatility trade-off; Leverage effect; Volatility feedback effect; Time-varying; DCCA;
    All these keywords.

    JEL classification:

    • C10 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - General
    • C14 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Semiparametric and Nonparametric Methods: General
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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