The causes of stock market volatility in Australia

Abstract

The paper examines the extent to which the conditional volatility of stock market returns in a small, internationally integrated stock market are related to the conditional volatility of financial and business cycle variables. It employs a low frequency monthly dataset for Australia including stock market returns, interest rates, inflation, the money supply, industrial production and the current account deficit over the period from July 1972 to January 1994. A novel feature of the analysis is the estimation strategy employed to overcome the generated regressors problem which pervades some recent related research. Specifically, the procedure of employing a two-stage estimation process to first estimate conditional volatilities and then model their interrelationships yields inefficient estimates, introduces bias into a number of diagnostic test statistics and generates potentially invalid inferences. This problem is overcome in the current paper by jointly estimating the equation for the conditional volatility of stock market returns together with the equations determining the conditional volatilities of all variables included in the model using the generalized least squares (GLS) estimation procedure together with the Hendry general-to-specific modelling strategy. Among the most important determinants of the conditional volatility of the Australian stock market are found to be the conditional volatilities of inflation and interest rates which are directly associated with stock market volatility, and the conditional volatilities of industrial production, the current account deficit and the money supply which are indirectly associated with stock market conditional volatility. Among these variables, the strongest effect is found to be from the conditional volatility of the money supply to the conditional volatility of the stock market. By contrast, no evidence is found of volatility spillover from the foreign exchange market to the stock market in Australia.

The Impact of Macroeconomic Factors on Amman Stock Market Returns

“…This is in agreement with the studies of Geske and Roll (1983), Chen, Roll and Ross (1986), Fama (1990), Kearney and Daly (1998), and Maysami & Koh (2000) Maghayereh (2002), Al-Sharkas (2004).…”

Dynamics of volatility spillover between stock market and foreign exchange market: evidence from Asian Countries

“…In contrast to empirical evidences discussed in above literature, there are also studies that reported no evidence of flow of volatility between stock market and foreign exchange market, see (Apergis and Rezitis 2001;Kearney and Daly 1998;Morales 2008). Apergis and Rezitis (2001) extended the literature for New York and London and found no evidence of volatility transmission between currency and stock market.…”

“…Morales (2008) empirically studied Six Latin American countries; Venezuela, Argentina, Mexico, Brazil, Colombia and Spain with a European country and found no clear evidence of flow of volatility between the two financial markets. Kearney and Daly (1998) tested the stated relationship for Australia and found no evidence of volatility flow between currency market and stock market.…”

Stock Market Volatility: Comparison Between Dhaka Stock Exchange and Chittagong Stock Exchange

“…In Bangladesh, flow of cash is not generally based on past profit and thus the credit markets have greater impact on the retained earnings of the firms. Kearney and Daly (1998) examines the extent to which the conditional volatility of stock market returns in a small, internationally integrated stock market are related to the conditional volatility of finance and business cycle volatility. It employs a low frequency monthly dataset for Australia including stock market returns, interest rates, inflation, the money supply, industrial production and the current account deficit.…”