Sources of volatility in stock returns in emerging markets

Date
2005
Authors
Caner, S.
Önder, Z.
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Instructor
Source Title
Applied Economics
Print ISSN
0003-6846
Electronic ISSN
1466-4283
Publisher
Routledge
Volume
37
Issue
8
Pages
929 - 941
Language
English
Type
Article
Journal Title
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Abstract

In this study, the short-term fluctuations in the monthly returns on composite indexes of 17 emerging markets affected by the financial crises in the late 1990s and 2000 are decomposed with vector autoregressive estimates. The results are compared to the behaviour of variation in returns in developed markets. Three different models are estimated for each market. Due to first order autocorrelations, lagged returns contribute significantly to return volatility in emerging markets. Decomposition of variances indicates that dividend yield and interest rate are determining factors of volatility, but at varying degrees in different emerging markets. However, the role of dividend yield is not as strong as it is in the developed markets as efficient markets hypothesis would imply. In some cases, exchange rates significantly influence market volatility. Fluctuations in the world portfolio return have a small effect on return volatility in national markets. However, there are significant differences across all emerging markets that point to differences in market structures and particular conditions in each country. Significant contributions of interest rates, exchange rates and inflation imply the role of monetary and fiscal policy as precedents of financial crises.

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Keywords
Financial crisis, Financial market, Stock market
Citation
Published Version (Please cite this version)