International comparisons of stock market volatility Essay

International comparisons of stock market volatility - Essay Example 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 em erging 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 t o 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