Volatiltiy and Links between National Stock Markets

58 Pages Posted: 8 Sep 2010 Last revised: 15 Sep 2010

See all articles by Mervyn King

Mervyn King

Bank of England; National Bureau of Economic Research (NBER)

Enrique Sentana

Centro de Estudios Monetarios y Financieros (CEMFI); Financial Markets Group; Centre for Economic Policy Research (CEPR)

Sushil Wadhwani

Bank of England - Monetary Policy Committee

Date Written: May 1990

Abstract

The empirical objective of this study is to account for the time-variation the covariances between markets. Using data on sixteen national stock markets, we estimate a multivariate factor model in which the volatility of returns is induced by changing volatility in the orthogonal factors. Excess returns are assumed to depend both on innovations in observable economic variables and on unobservable factors. The risk premium on an asset is a near combination of the risk premia associated with factors. The main empirical finding is that only a small proportion of the time variation in the covariances between national stock markets can be accounted for by observable economic variables. Changes in correlations markets are given primarily by movements in unobservable variables. We also estimate the risk premia for each country, and are able to identify substantial movements in the required return on equity. Our results also suggest that, although inter-correlations between markets have risen since the 1987 stock market crash this is not necessarily evidence of a trend decrease.

Suggested Citation

King, Mervyn A. and Sentana, Enrique and Wadhwani, Sushil, Volatiltiy and Links between National Stock Markets (May 1990). NBER Working Paper No. w3357. Available at SSRN: https://ssrn.com/abstract=1673680

Mervyn A. King (Contact Author)

Bank of England ( email )

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National Bureau of Economic Research (NBER)

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Enrique Sentana

Centro de Estudios Monetarios y Financieros (CEMFI) ( email )

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Spain
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HOME PAGE: http://www.cemfi.es/~sentana/

Financial Markets Group

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Centre for Economic Policy Research (CEPR)

London
United Kingdom

Sushil Wadhwani

Bank of England - Monetary Policy Committee ( email )

Threadneedle Street
London EC2R 8AH
United Kingdom
+44 20 7601 3235 (Phone)

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