International Comparisons of Stock Market Volatility - Essay Example

?International comparisons of stock market volatility Introduction The 2007/2008 global economic crises made the financial markets respond to the contagion effect. Contagion effect implies that when one sector fails due to some reasons, the impact will also be felt by other sectors. From the 2007 to 2012, the markets have been very volatile due to the fluctuations of the stock markets (Beirne et al 2008). It is vital to understand the concept of volatility in global stock markets. With the nature of uncertainties that stock markets are experiencing, much attention has now been directed towards volatility. Even researchers and practitioners have made modeling of stock volatility a subject of empirical and theoretical study. Historically, stock market volatility is approximately 20% per annum and 5.8% per month even though periods of high and low volatilities are experienced. During the financial crisis, there was a 50 percent drop in stock prices. The effects of the crisis are still being felt due to increased public and private debt, levels of unemployment and global capitalism. The governments are doing their best to prevent and contain the situation buy formulating new policies and reforming major sectors. Volatility measures the degree of variability between stock prices. In other words, it determines the degree of deviation between the current price of an asset and the average past price. To understand volatility, it is important to take a look at the nature and trends of global markets and the correlation of the stock market returns. For many investors, volatility is a risk, thus, it is to be taken into consideration in analyzing their portfolios. Some of the factors that lead to volatility include changes in technology, new financial instruments such as derivatives and the increased integration of global markets. Volatility is measurable, and the commonly used measure is Chicago Board Options Exchange Index (CBOE) of implied (VIX) volatility. In this paper, we will use a sample of 19 emerging markets economies (EMEs) and developed market in Europe, Latin America, Middle East and Asia as a basis of comparison on the stock market’s volatility. Most of the previous research papers focused on regional and local stock markets but due to the national integration that is linking markets globally, we use will compare countries from different continents (Beirne et al 2008). Nature of stock markets in emerging and developed markets Global markets consist of emerging and developed stock markets. A few studies have been done to examine the characteristics of emerging markets. According to these studies, emerging markets are characterized by higher average returns, low correlations with developed markets, higher volatility and more predictability of returns (Chukwuogor 2008). Their main argument was that volatility in emerging markets is high and difficult especially in the segmented markets. Segmented markets are influenced by local factors. Their returns tend to be skewed and highly non-normally distributed. Volatility in emerging markets has been declining following capital market capitalization. The correlation in emerging markets is quite higher than in the developed markets due to lack of diversification and trading depths (Chukwuogor 2008). The volatility in these markets is highly influenced by social, political, economic factors. Data and methodology The studies also focused only on the emerging markets and not developed markets. We will use daily returns and volatilities of such returns for the 19 countries using data from 2001 to 2009. We use the GARCH model to determine the means and variances of stock returns in these countries. The Standard and Poor (S & P) index is used to rank the countries. Below is a table showing the emerging and developed markets. TABLE 1 Country Index USA S&P 500 UK FTSE 100 France CAC 40 Germany DAX 30 Xetra Australia All Ordinaries China/Hong kong Hang Seng Singapore Strait Times Malaysia Kuala Lumpur Composite Thailand stock exchange of Thailand China Shanghai composite Indonesia Jakarta composite Chile chile stock market general Brazil IBOV Mexico MEXBOL South Africa JALSH Korea KOSPI Taiwan TWSE India BSE Sensex India S & P CNX NIFTY  TABLE 2 DEVELOPED MARKETS               country   2001 2002 2003 2004 2005 2006 2007 2008 2009 Australia Mean -0.04 -0.07 0.12 0.09 0.06 0.11 0.09 -0.49 0.36   SD 1.13 1.09 0.96 1.05 0.86 0.99 1.55 3.89 2.64 France Mean -0.2 -0.18 0.09 0.07 -0 0.09 0.03 -0.35 0.07   SD 1.48 2.16 1.34 1.01 0.79 1.08 1.2 3.42 2.82 Germany Mean -0.2 -0.2 0.15 0.05 -0 0.07 0.1 -0.32 0.11   SD 1.56 2.46 1.68 1.14 0.86 1.13 1.1 3.33 2.98 China/Hong Kong Mean -0.18 -0.1 0.06 0.07 0.03 0.1 0.09 0.39 0.37   SD 1.65 1.21 1.04 0.99 0.71 0.92 1.65 3.57 3 UK Mean -0.12 -0.24 0.03 0.07 -0 0.07 0.01 -0.41 0.11   SD 1.31 1.63 1.11 0.83 0.65 0.92 1.24 3.25 3.07 USA Mean -0.15 -0.14 0.09 0.06 0 0.03 0.01 -0.29 0.01   SD 1.27 1.72 1.09 0.72 0.63 0.64 1.02 2.75 2.62  TABLE 3 EMERGING MARKETS             country   2001 2002 2003 2004 2005 2006 2007 2008 2009 Brazil Mean -0.14 -0.18 0.23 0.18 0.08 0.03 0.09 -0.47 0.61   SD 2.61 2.94 2.04 2.26 1.98 2.12 2.35 5.85 3.9 Chile Mean -0.03 -0.08 0.2 0.19 0.06 0.09 0.02 -0.27 0.48   SD 0.83 0.89 0.85 0.96 0.78 0.82 1.17 2.76 1.83 china Mean -0.1 0.04 -0.02 -0.1 -0.09 0.25 0.27 -0.59 0.63   SD 1.13 1.59 1.15 1.36 1.41 1.33 2.32 3.37 2.15 India Mean -0.15 -0.03 0.17 0.08 0.06 0.2 0.06 -0.57 0.49   SD 1.68 1.1 1.19 1.81 1.19 1.73 1.67 3.94 3.7 India Mean -0.12 -0.02 0.16 0.08 0.1 0.18 0.08 -0.56 0.46   SD 1.59 1.07 1.26 1.96 1.38 0.03 1.72 3.87 3.65 Indonesia Mean -0.12 0.13 0.13 0.13 -0.02 0.15 0.03 -0.51 0.64   SD 2.27 1.64 1.31 1.71 0.47 1.79 1.78 4.09 3.28 Malaysia Mean -0.05 -0.03 0.1 0.04 0.13 0.11 0.11 -0.32 0.28   SD 1.1 0.81 0.77 0.74 0.13 0.66 1.21 2.01 1.7 Mexico Mean 0.05 -0.04 0.14 0.15 1.14 0.09 -0.02 -0.29 0.23   SD 1.63 1.65 1.03 1.08   1.7 1.61 4.01 3.42 SA Mean -0.17 0.07 0.12 0.14 0.04 0.1 -0.03 -0.38 0.31   SD 1.51 1.6 1.14 1.3 1.27 1.89 1.84 4.21 3.29 Taiwan Mean 0.12 -0.08 0.07 0.11 0 0.01 0.05 -0.36 0.46   SD 2.02 1.71 1.3 1.51 0.95 1.19 1.36 2.97 3.02 Thailand Mean -0.03 0.07 0.34 -0.1 0.03 0 0.11 -0.39 0.35   SD 1.62 1.39 1.32 1.63 1 1.88 1.59 2.92 2.12 Korea Mean 0.16 -0.04 0.02 0.14 0.12 0 0.12 -0.49 0.39   SD 2.17 2.05 1.64 1.64 1.17 1.38 1.68 5.04 3.43 Singapore Mean -0.11 -0.1 0.04 0.1 0.06 0.11 0.01 -0.4 0.29   SD 1.42 1.23 1.24 0.95 0.7 0.94 1.55 3.09 3.03 Empirical results The average daily returns are represented by mean while the standard deviation measures the volatility of markets. Table 2 shows the daily mean returns and volatility of stock markets in developing countries. In 2001 and 2002, the daily average returns for all countries are negative, but the volatility is higher. In addition, the volatilities for all countries are above 1 percent. In 2003 and 2004, positive returns were recorded for all developed markets while their volatility was relatively lower (Chukwuogor 2008). In 2005, Germany, UK and France had negative average returns while the rest countries in developed markets had positive returns which were below 1%. The volatility was the lowest in this period as a result of returns below 1 percent. During years, 2006 and 2007 all developed countries have positive returns and a relatively higher volatility in 2006 compared to rear 2005. In 2007, the more volatility has been experienced compared to 2006. In 2008, the volatility was highest in the entire study. Also, all countries had the highest negative returns in the entire study. This is as a result of the impact of the 2008 financial crisis which affected all sectors of the economy especially in developed markets. In 2009, all markets experienced positive returns, highest returns being in Australia and Hong Kong which had 0.36 and 0.37 respectively. On the other hand, the volatility is high for almost all countries but less compared to 2008. Table 3 shows average daily returns and volatility patterns for emerging markets. In 2001 and 2002, the daily mean is negative for most countries except in Malaysia, Taiwan and Korea in 2001 and Chile, Indonesia and South Africa in 2002. From year’s 2003 to 2007 majority of the emerging countries have experienced positive returns. In 2008, all countries had negative returns due to the global financial crisis. Brazil recorded the highest standard deviation followed by Korea and then Indonesia while lowest volatility was experienced by Malaysia. Other countries such as china, India, Singapore and Thailand lie in between. In year 2009, average return and standard deviation were high for all countries though the volatility was less compared to 2008. Looking at the trend of average returns and volatility between developed and emerging markets, higher returns and volatility are experienced in emerging markets in comparison with developed markets. Conclusion From the empirical result analysis, a distinct pattern in returns and volatility is being observed in emerging and developed markets. Higher returns and volatility are observed in emerging markets. During the financial breakdown, both markets have recorded extreme values in mean and standard deviation. That is the reason why significant changes in policies had to be done to mitigate the financial crisis. References Beirne, J., Guglielmo, M., Caporale, Schulze-Ghattas, M. & Spagnolo, N., 2008. Volatility Spillovers and Contagion from Mature to emerging stock markets. International monetary Fund. Chukwuogor, C., 2008. Stock markets returns and volatilities: A global comparison. Eurojournals publishing. [Online] Available at http://www.eurojournals.com/irjfe%2015%20chiak.pdf Stock market volatility: An international comparison, 2009. [Online] Available at http://www.utiicm.com/Research/PDFs/Volatility.pdf Read More