Financial crises and emerging stock markets volatility: do internal factors matter?

Abstract

This paper has two central aims. The first one is to deal empirically with the effects of financial crises on emerging stock markets volatility. The second objective consists in testing if the level of stock market development affects this relationship. For this purpose, we estimate a static panel data model for a sample of nine emerging economies from January 1990 to December 2006. We consider three types of financial crises, i.e. banking, currency and twin crises. Our empirical results suggest that the onset of financial crises strongly increased stock market volatility. In addition, we find that the biggest impact is exerted by twin crises. When dealing with the second objective, our results show that the market size and the liquidity level can attenuate the effects of banking and currency crises, but not the one associated to twin crises. Nevertheless, the degree of stock market integration seems to reduce the effects of banking, currency and twin crises on stock market volatility.

Keywords:

• emerging stock markets
• conditional volatility
• financial crises
• market development

JEL classification:

• G01
• G10
• C23

Acknowledgements

We thank the editor and the anonymous referees for helpful comments on the first draft of this paper, as well as professor Jaleleddine Ben Rejeb for thoughtful and detailed suggestions.

Notes

1. We thank the reviewer for attracting our attention to this point.

2. For robustness check, we tried to use the MS-GARCH (1,1) model to compute the conditional volatility. However, estimation results using this model were not satisfactory, since for five countries the probability of transition between the two regimes is not statistically significant. These results confirm that the use of the GARCH (1,1) model is more appropriate in our case.

3. We used the MSCI index to calculate the return volatility for five developed countries (Australia, Belgium, Canada, Japan and the United States) and for the world market. Results are not displayed here and are available from authors upon request.

4. For further details on the role of the ADR and country funds in emerging stock markets liberalization, refer to Bekaert and Harvey (1997).