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Stock Returns and Volatility in Emerging Financial Markets

Discussion Paper 93 | Published July 1, 1994

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Giorgio De Santis

Selahattin Imrohoroglu

Stock Returns and Volatility in Emerging Financial Markets


In this paper we study the dynamic behavior of stock returns and volatility in emerging financial markets. In particular, we focus our attention on the following questions:

o Does stock return volatility in emerging markets change over time? If so, are volatility changes predictable?

o How frequent are big surprises in emerging stock markets?

o Is there any relationship between market risk and expected returns?

o Has liberalization affected return volatility in emerging financial markets?

Our findings can be summarized as follows. First, there is strong evidence of predictable time-varying volatility in almost all countries. In general, changes in volatility are highly persistent. Second, a fat-tailed distribution improves the fitting ability of the model. Third, investors are not rewarded for market-wide risk. Finally, we do not find any systematic effect of liberalization on stock market volatility.