Stock Return Volatility in Emerging Markets

This paper presents an empirical analysis of volatility and contagion across 19 emerging and developed stock markets in the 1990s. First, using an efficient estimate of unconditional stock return volatility we show that contemporaneous return and volatility correlation across stock markets have increased substantially in the 1990s. Second, using simple rolling regressions and goodness of fit measures we identify periods of persistent volatility in each market and volatility contagion across markets. For example, we show the persistent volatility in the Istanbul Stock Exchange (ISE) during the 1994 economic crisis in Turkey. We can also differentiate between the effects of the East Asian and the Russian crisis on ISE. Finally, we apply Generalized Autoregressive Conditional Heteroscedasticity (GARCH) technique to obtain robust estimates of volatility contagion in ISE. We modify GARCH model by incorporating other countries’ lagged unconditional volatility estimates as the exogenous explanatory variable in the conditional variance equation for ISE. The results indicate that volatility contagion effects are carried to ISE through the New York and Hong Kong Stock Exchanges. * Paper presented at the “Learning to Live with Contagion in Capital Movements An Emerging Market Perspective: Turkey” Conference, organized by the Center for Economics and Econometrics at Bogazici University on June 4, 1999 with financial support from Credit Suisse First Boston. Correspondence Address: Kamil Yilmaz, College of Administrative Sciences and Economics, Koc University, Cayir Cad. No: 5, 80860 Istinye, Istanbul, Turkey. Tel: (90-212) 229 3006 x458, Fax: (90-212) 229 6674, email: [email protected].