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.