Emerging Equity Market Volatility

Abstract

Understanding volatility in emerging capital markets is important for determining the cost of capital and for evaluating direct investment and asset allocation decisions. We provide an approach that allows the relative importance of world and local information to change through time in both the expected returns and conditional variance processes. Our time-series and cross-sectional models analyze the reasons that volatility is different across emerging markets, particularly with respect to the timing of capital market reforms. We find that capital market liberalizations often increase the correlation between local market returns and the world market but do not drive up local market volatility.

Keywords: Emerging markets, volatility, capital market reforms, asymmetric volatility, country risk, market liberalization, financial openness, market integration, market segmentation

JEL Classification: G12, G15, F30