Volatiltiy and Links Between National Stock Markets / Mervyn King, Enrique Sentana, Sushil Wadhwani.

Format:

Book

Author/Creator:

King, Mervyn.

Contributor:

National Bureau of Economic Research.

Sentana, Enrique.

Wadhwani, Sushil.

Series:

Working Paper Series (National Bureau of Economic Research) no. w3357.

NBER working paper series no. w3357

Language:

English

Subjects (All):

Multivariate analysis.

Stock exchanges.

Physical Description:

1 online resource: illustrations (black and white);

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 1990.

Cambridge, Massachusetts : National Bureau of Economic Research, 1990.

Summary:

The empirical objective of this study is to account for the time-variation the covariances between markets. Using data on sixteen national stock markets, we estimate a multivariate factor model in which the volatility of returns is induced by changing volatility in the orthogonal factors. Excess returns are assumed to depend both on innovations in observable economic variables and on unobservable factors. The risk premium on an asset is a near combination of the risk premia associated with factors. The main empirical finding is that only a small proportion of the time variation in the covariances between national stock markets can be accounted for by observable economic variables. Changes in correlations markets are given primarily by movements in unobservable variables. We also estimate the risk premia for each country, and are able to identify substantial movements in the required return on equity. Our results also suggest that, although inter-correlations between markets have risen since the 1987 stock market crash this is not necessarily evidence of a trend decrease.

Notes:

Print version record

May 1990.