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The causes of stock market volatility in Australia

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  • Colm Kearney
  • Kevin Daly

Abstract

The paper examines the extent to which the conditional volatility of stock market returns in a small, internationally integrated stock market are related to the conditional volatility of financial and business cycle variables. It employs a low frequency monthly dataset for Australia including stock market returns, interest rates, inflation, the money supply, industrial production and the current account deficit over the period from July 1972 to January 1994. A novel feature of the analysis is the estimation strategy employed to overcome the generated regressors problem which pervades some recent related research. Specifically, the procedure of employing a two-stage estimation process to first estimate conditional volatilities and then model their interrelationships yields inefficient estimates, introduces bias into a number of diagnostic test statistics and generates potentially invalid inferences. This problem is overcome in the current paper by jointly estimating the equation for the conditional volatility of stock market returns together with the equations determining the conditional volatilities of all variables included in the model using the generalized least squares (GLS) estimation procedure together with the Hendry general-to-specific modelling strategy. Among the most important determinants of the conditional volatility of the Australian stock market are found to be the conditional volatilities of inflation and interest rates which are directly associated with stock market volatility, and the conditional volatilities of industrial production, the current account deficit and the money supply which are indirectly associated with stock market conditional volatility. Among these variables, the strongest effect is found to be from the conditional volatility of the money supply to the conditional volatility of the stock market. By contrast, no evidence is found of volatility spillover from the foreign exchange market to the stock market in Australia.

Suggested Citation

  • Colm Kearney & Kevin Daly, 1998. "The causes of stock market volatility in Australia," Applied Financial Economics, Taylor & Francis Journals, vol. 8(6), pages 597-605.
  • Handle: RePEc:taf:apfiec:v:8:y:1998:i:6:p:597-605
    DOI: 10.1080/096031098332637
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    18. Urom, Christian & Ndubuisi, Gideon & Ozor, Jude, 2021. "Economic activity, and financial and commodity markets’ shocks: An analysis of implied volatility indexes," International Economics, Elsevier, vol. 165(C), pages 51-66.
    19. Vithessonthi, Chaiporn & Tongurai, Jittima, 2013. "The perils of a central bank's capital control: How substantial is the effect on firm value?," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 23(C), pages 111-135.
    20. Khalil Jebran & Amjad Iqbal, 2016. "Dynamics of volatility spillover between stock market and foreign exchange market: evidence from Asian Countries," Financial Innovation, Springer;Southwestern University of Finance and Economics, vol. 2(1), pages 1-20, December.
    21. Kearney, Colm, 2000. "The determination and international transmission of stock market volatility," Global Finance Journal, Elsevier, vol. 11(1-2), pages 31-52.
    22. Kajtazi, Anton & Moro, Andrea, 2019. "The role of bitcoin in well diversified portfolios: A comparative global study," International Review of Financial Analysis, Elsevier, vol. 61(C), pages 143-157.
    23. Rilwan Sakariyahu & Mohamed Sherif & Audrey Paterson & Eleni Chatzivgeri, 2021. "Sentiment‐Apt investors and UK sector returns," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 26(3), pages 3321-3351, July.
    24. Sadorsky, Perry, 2003. "The macroeconomic determinants of technology stock price volatility," Review of Financial Economics, Elsevier, vol. 12(2), pages 191-205.
    25. Sharif Ullah Jan & Hashim Khan, 2018. "Return Volatility and Macroeconomic Factors: A Comparison of US and Pakistani Firms," Business & Economic Review, Institute of Management Sciences, Peshawar, Pakistan, vol. 10(2), pages 1-28, June.

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