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Asymmetric stochastic volatility in emerging stock markets

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  • Faruk Selcuk

Abstract

Daily stock market volatility in a sample of emerging market economies is investigated utilizing an asymmetric stochastic volatility (ASV) model which is estimated with Markov Chain Monte Carlo (MCMC) method. The results indicate that the ASV model captures the volatility dynamics in those stock markets successfully. Particularly, it is shown that volatility has a significant persistency and the variability of volatility is higher as compared to advanced economies. The paper also provides evidence for significant negative correlation between shocks to the stock market index and shocks to volatility, the so-called 'leverage effect'. Furthermore, the estimation results show that the persistency in volatility and the variability of volatility are negatively related: higher variability of volatility implies lower persistency in volatility series and vice versa. In addition, persistency in volatility and the magnitude of leverage effect are negatively correlated: high persistency is associated with relatively lower leverage effect.

Suggested Citation

  • Faruk Selcuk, 2005. "Asymmetric stochastic volatility in emerging stock markets," Applied Financial Economics, Taylor & Francis Journals, vol. 15(12), pages 867-874.
    • Handle: RePEc:taf:apfiec:v:15:y:2005:i:12:p:867-874
    DOI: 10.1080/09603100500077136
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    2. Shamila Jayasuriya & William Shambora & Rosemary Rossiter, 2009. "Asymmetric Volatility in Emerging and Mature Markets," Journal of Emerging Market Finance, Institute for Financial Management and Research, vol. 8(1), pages 25-43, April.
    3. In Kim & In-Seok Baek & Jaesun Noh & Sol Kim, 2007. "The role of stochastic volatility and return jumps: reproducing volatility and higher moments in the KOSPI 200 returns dynamics," Review of Quantitative Finance and Accounting, Springer, vol. 29(1), pages 69-110, July.
    4. Rydlewski, Jerzy P. & Snarska, Małgorzata, 2014. "On geometric ergodicity of skewed—SVCHARME models," Statistics & Probability Letters, Elsevier, vol. 84(C), pages 192-197.
    5. Talpsepp, Tõnn & Rieger, Marc Oliver, 2010. "Explaining asymmetric volatility around the world," Journal of Empirical Finance, Elsevier, vol. 17(5), pages 938-956, December.
    6. Hong, Hui & Bian, Zhicun & Chen, Naiwei, 2020. "Leverage effect on stochastic volatility for option pricing in Hong Kong: A simulation and empirical study," The North American Journal of Economics and Finance, Elsevier, vol. 54(C).
    7. Huang, Bor-Yi & Chiou, Jer-Shiou & Wu, Pei-Shan, 2007. "Abnormal profitability and foreign investment based on the investigation of covered interest parity," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 384(2), pages 475-484.

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