Conditional Heteroskedasticity and Global Stock Return Distributions

Abstract

This paper investigates conditional return distribution characteristics for seven developed markets (DMs) and eight emerging markets (EMs). With the exception of Germany and Japan, the behavior of monthly returns of DM sample countries is similar to that of the U.S. In contrast, EM returns exhibit a substantially greater degree of serial correlation and a higher incidence of autoregressive conditional heteroskedasticity (ARCH) in monthly data. Aggregation of returns into two‐ and three‐month holding periods decreases the significance of the ARCH effects. However, there are cross‐sectional differences in the rate at which ARCH effects become insignificant. The findings of ARCH in monthly returns sample data is attributed to differences in the rate at which information arrives and is transmitted into prices in each market.

The economics of conditional heteroskedasticity: Evidence from canadian and U.S. stock and futures markets

“…~ Even though institutional investors may trade less frequently than individual investors, their trades may more often be based on information. Although some have suggested that institutional investors are noise traders who engage in herd behavior [Errunza et al, 1994;Trueman, 1988], other evidence suggests that institutional investors are informed traders. Institutional investors devote substantial resources to information search [Potter, 1992].…”

“…Sample markets with significant ARCH are characterized by concentration of ownership, no forward or futures trading, higher transactions costs, and large bid-ask spreads. Errunza et al [1994] point out that these market features may affect the flow of information resulting in ARCH effects.…”

“…In a recent article, Errunza et al [1994] examine the monthly returns behavior of 14 stock index series. ARCH is observed more often in emerging markets than in developed markets.…”

Non-Linearity Behaviour of the ALBI Index: A Case of Johannesburg Stock Exchange in South Africa

“…Sewell, et al, (1993) recorded evidence of linear dependencies in the stock markets of Japan, Korea, and Hong Kong. Yet, Errunza, et al, (1994) noted nonlinear dependencies in the stock markets of Japan, Germany, Brazil, Chile, Mexico, and India. Although, evidence on non-linearity has been recorded in literature, it has been inconclusive.…”

Management of Stock Price and It Effect on Economic Growth: Case Study of West African Financial Markets

“…However, the empirical evidence indicated that: 1) Stock return distribution is not normally distributed but it is found to be leptokurtic (Fama E. , 1965), (Westerfield, 1977), (Hagerman R., 1978), (Peiró, 1999), (Valkanov, 2006), (Ghysels, 2007) among others. 2) Linear as well as non-linear dependency exists in stock prices (French & Roll, 1986), (Errunza, Hogan, Kini, & Padmanabh, 1994), (Booth & al, 1994), (Corhay & Rad, Daily returns from European stock markets., 1994), (Yadav, Paudyal, & Pope, 1999), among others; 3) Anomalies/Seasonalities in return distribution such as the day of the week effect, January effect, the holiday effect, the size effect and others do exist (Keim & Stambaugh, 1984), (Rogalski, 1984), (Jaffe, Jeffery, & Westerfield, 1985, 1989, (Smirlock & Starks, 1986), Wong et al(1992), (Cheung, Ho, & Draper, 1994), (Alexakis & Xanthakis, 1995), (Martikainen & Puttonen, 1990), among others. The main literature of characteristics of stock return was studied by (Hsieh D. , 1988).…”