Testing for Structural Breaks and Dynamic Changes in Emerging Market Volatility

Posted: 2 Oct 2007

See all articles by Duc Khuong Nguyen

Duc Khuong Nguyen

IPAG Business School

Mondher Bellalah

Universite de Cergy-Pontoise; ISC Paris School of Management

Date Written: February 2007

Abstract

The main objective of this paper is to test for structural breaks and dynamic changes in emerging market volatility from January 1985 to January 2003. We typically relate these issues to stock market reforms since the latter is often considered as one of the most important forces that promote economic growth and rapid maturation of the emerging markets of the world. We first estimate a bivariate GARCH-M model to obtain conditional volatility series for each market. Second, we test for significant structural breaks in the conditional volatility series to determine whether the observed break dates coincide with any of the stock market reforms. Third, the effect of liberalization policy on market volatility is formally tested using a pooled time-series cross-section estimation that includes a host of explanatory variables in addition to market reform variables. Overall, the results indicate that structural breaks in the dynamic patterns of the sample emerging market volatility do not happen together with official liberalization dates, but they coincide with ADR/Country Fund dates and with dates of large increases in the US capital flows. The pooled estimation generally supports the findings from structural break analysis. Hence, it is possible to claim that liberalization methods other than liberalization via a formal policy decree are the ones that significantly affect volatility.

Keywords: Stock Market Liberalization, Return Volatility, Emerging Stock Markets, Bivariate GARCH-M models, Structural Breaks, Pooled Time-Series Analysis

JEL Classification: F30, G15

Suggested Citation

Nguyen, Duc Khuong and Bellalah, Mondher, Testing for Structural Breaks and Dynamic Changes in Emerging Market Volatility (February 2007). Available at SSRN: https://ssrn.com/abstract=975267 or http://dx.doi.org/10.2139/ssrn.975267

Duc Khuong Nguyen (Contact Author)

IPAG Business School ( email )

184 BD Saint Germain
Paris, 75006
France

HOME PAGE: http://www.ipag.fr/en/

Mondher Bellalah

Universite de Cergy-Pontoise ( email )

33 Boulevard du Port
Cergy-Pontoise Cedex, Cedex 95011
France

ISC Paris School of Management

22, Boulevard du Fort de Vaux
Paris, 75848
France

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