Stock Market Liberalization and Return Volatility: Evidence from the Emerging Market of Sri Lanka
29 Pages Posted: 6 Nov 2009 Last revised: 9 Nov 2009
Date Written: December 1, 2009
This study examines the impact of liberalization of the Sri Lankan stock market on return volatility. We specify GARCH and TGARCH models of volatility, and estimate them using 16 years of weekly returns for the period from 1985 to 2000. The results show that liberalization of the market to foreign investors significantly increased the return volatility in the Colombo Stock Exchange. Both conditional and unconditional volatility measures are the highest in the liberalization period. Negative return shocks lead to lower volatility suggesting that there is no leverage effect, and this appears to reflect the very low levels of leverage used by Sri Lankan companies.
Keywords: liberalization, volatility, GARCH and TGARCH models, emerging markets, Sri Lanka
JEL Classification: F37, G12, G15
Suggested Citation: Suggested Citation