Sources of volatility in stock returns in emerging markets

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.

Market Movement, Earning Capacity and Asset Fluctuation in Taiwanese Stock Exchange

“…Negative cross-variable effects are also observed in Models 4 and 5, partly because of a negative correlation (with a correlation coefficient of -0.33) between market movement and earnings volatility. As mentioned by Caner and Önder (2005), the asset market volatility in emerging markets may be associated with other risks, such as the exchange rate risk and lagged return. One interesting finding in their study shows that exchange rate volatility is not a significant factor for return volatility in the Taiwanese market.…”

Equity market valuation, systematic risk and monetary policy

“…He shows in particular that investors are more sensitive to news during periods of high uncertainty, which in turn increases asset price volatility. Other studies that show evidence of a linkage between macroeconomic events and the price volatility of various financial assets include Jones et al (1998), Flannery and Protopapadakis (2002), Anderson et al (2003), Caner and Ö nder (2005), Teles and Andrade (2008) and, more recently, Arin and Gur (2009). Economic indicators examined in these studies include Gross Domestic Product (GDP), inflation, exchange rate and money supply.…”

“…With inflation largely under control in recent years but with increasing volatility in the pricing of financial and real assets, it is conceivable that policy makers might begin to give more attention to asset valuation or at least the factors influencing changes in asset values (Caner and Ö nder, 2005). Of particular interest is the study by Borio et al (1994) which document the emergence of major boom-bust cycles in equity and real asset prices in the 1980s.…”

The effect of the european economic news releases to the US financial markets in the crisis period

“…Stiglitz (2002) states that rising capital record advancement has increased the instability of capital streams. Caner and Onder (2005) have outlined the factors that explain the sources of volatility in stock returns. Yields, exchange rates, interest rates, inflation rates and international market indices have been identified as the most significant variables to affect stock market volatility.…”