International portfolio's diversification and stock markets volatility

Résumé du document

The current paper aims at studying the volatility of thirteen stock markets returns (mature and emerging) by means of ARCH models in order to see its effects on the potential gains of international diversification. Then, we identify the effects of the volatility's temporal variation on the international correlation of stock markets.

The empirical results show that an ARCH effect exists for all the returns series and that volatility is persistent and asymmetrical according to the shock nature. Moreover, the volatility spillover, which is important for the mature stock markets, is checked for the majority of stock markets indices. Indeed, we observe the contagion effect which negatively affects the potential gains of international portfolio diversification. The assumption stipulating the increase of a coefficient correlation in time of high volatility, which reduces the benefit of international diversification, is confirmed for the majority of markets.

The current paper aims at studying the volatility of thirteen stock markets returns (mature and emerging) by means of ARCH models in order to see its effects on the potential gains of international diversification. Then, we identify the effects of the volatility's temporal variation on the international correlation of stock markets. The empirical results show that an ARCH effect exists for all the returns series and that volatility is persistent and asymmetrical according to the shock nature. Moreover, the volatility spillover, which is important for the mature stock markets, is checked for the majority of stock markets indices. Indeed, we observe the contagion effect which negatively affects the potential gains of international portfolio diversification. The assumption stipulating the increase of a coefficient correlation in time of high volatility, which reduces the benefit of international diversification, is confirmed for the majority of markets.

Characterized by its integration and a reduction into the international financial investment barriers during the last decades, the international financial market situation encouraged the investors to distribute their wealth between several stock exchange markets. At this level, we can say that such an investment aims at a better widening of the financial markets. This release was characterized by the progressive lifting of various barriers to the foreign investment and by the suppression of capital movement restrictions, where the intervention of international diversification serves to improve the profitability of various financial assets rather than the domestic diversification.

For that, international investment has been regarded for a long time as a means to reduce and distribute the total risk of the financial portfolios by encouraging investment in companies belonging to different industrial branches. The reduction of the risks will be actually stronger mainly when the national economic situations are more and more different and disconnected. Hence, a fall in a stock exchange market is met by a rise in another stock exchange market.

Extraits

[...] ¶The degree of asymmetry makes it possible to compare the sensitivity of the stock markets to bad news. ¶Consequently, the United States market is the most sensitive market; on the other hand, the Malaysian market is the least sensitive one to bad news.¶ 5.4 International volatility spillover By measuring each stock markets' volatility (model the GARCH augmented model seeks to check the existence of the contagion volatility or a "spillover" effect between the stock markets. ¶The assumption that volatility is transmitted from country i to country j is accepted when is significantly different from zero.¶ Appendix Table gives the released coefficients of the estimated GARCH augmented ¶model. [...]

[...] et Zhou G. (1994), “What Determines Expected International Asset Returns”, NBER Working Paper 4660, Février. * Kaminsky, G., C.M. Reinhart, and C.A. Végh (2003), Unholy Trinity of Financial Contagion”, Journal of Economic Perspectives, Vol No pp. 51-74. * Kaminsky, G. and C.M. Reinhart (2000), Crises, Contagion, and Confusion”, Journal of International Economics, Vol No.1, pp. [...]

[...] D. (1989), “Exchange rate volatility and U.S. monetary policy: An ARCH application”, Journal of Money, Credit, and Banking pp. 66-77. * Lamoureux C. G. et W. D. Lastrapes, (1990), “Persistence in variance, structural change, and the GARCH model”, Journal of Business & Economic Statistics pp. [...]

[...] Wadhwani (1994), “Volatility and Links between National Stock Markets”, Econometrica, Vol.62, pp. 901-933. * King, M. and S. Wadhwani (1990), “Transmission of Volatility between Stock Markets”, Review of Financial Studies, Vol.3, No.1, pp. 5-33. * Karolyi, G.A. (2003), “Does International Financial Contagion Really Exist”, International Finance, Vol.6, No.2, pp.179-199. * Lastrapes W. [...]

[...] ¶¶Finally, the volatility surprise of the Argentinean stock market has a significant impact on the volatility of all the emerging stock markets except for Taiwan. Volatility spillover from mature to emerging markets:¶ The parameters of volatility spillover from mature to emerging markets showed that there is a mutual influence between the American market and the Latin America markets (Brazil, Argentina, and Mexico),¶ and also between the American and Hong Kong market.¶ This result can be explained by the geographical membership of Brazil, Argentina, Mexico and the United States and by the importance of the economic and financial exchanges between the United States and Hong Kong.¶ ¶Indeed, the American stock market volatility has a significant influence on the volatility of all the emerging stock markets except for the Taiwanese market. [...]