The Impact of Macroeconomic Variables on Stock Market Volatility: Evidence from Cross-Country Analysis Pre, During and Post GFC

Abstract

Using data from ten developed and seven emerging countries, we analyse stock market’s volatility and the macroeconomic factors that influence stock market's volatility from January 2001 till December 2012. We use standard historical volatility model followed by Jones et al. (1998) and Andersen and Bollerslev (1998) to calculate the historical stock market's volatility for the sample countries. Our results show that stock markets of the sample countries are volatile during the Global Financial Crisis (GFC) and these effects are statistically significant for the emerging county group. Selected macroeconomic variables and corporate governance indicators, such as rule of law, regulatory control and GDP per capita are positively associate with the stock market volatility, and corruption perception index and budget deficits are negatively correlated. Other macroeconomic variables such as, Co2 emission, tax revenue, agricultural value added and tourism receipt also found significant in the analysis. This suggests our sample emerging markets were volatile during 2007-2009 not only because of the GFC but also for the other macroeconomic factors. The robustness tests also produce a similar result with little variation.

Keywords: Macroeconomic variables; stock market volatility; Global Financial Crisis

JEL Classification: G14, G15