Volatility in Emerging Stock Markets

TLDR

The study investigates when large volatility shifts occur in emerging stock markets and identifies the global and local events that trigger them. An ICSS algorithm locates volatility shocks and their duration, after which the authors link each shock to contemporaneous events. The analysis finds both increases and decreases in volatility, largely driven by local events such as the Mexican peso crisis and Latin American hyperinflation, with the 1987 crash being the sole global event that significantly raised volatility across multiple markets.

Abstract

This study examines the kinds of events that cause large shifts in the volatility of emerging stock markets. We first determine when large changes in the volatility of emerging stock market returns occur and then examine global and local events (social, political, and economic) during the periods of increased volatility. An iterated cumulative sums of squares (ICSS) algorithm is used to identify the points of shocks/sudden changes in the variance of returns in each market and how long the shift lasts. Both increases and decreases in the variance are identified. We then identify events around the time period when shifts in volatility occur. Most events tend to be local and include the Mexican peso crisis, periods of hyperinflation in Latin America, the Marcos-Aquino conflict in the Philippines, and the stock market scandal in India. The October 1987 crash is the only global event during the period 1985–1995 that caused a significant jump in the volatility of several emerging stock markets.