Time-varying global and local sources of risk in Russian stock market

Saleem, Kashif and Vaihekoski, Mika (2007): Time-varying global and local sources of risk in Russian stock market.

Abstract

In this paper we study international asset pricing models and pricing of global and local sources of risk in the Russian stock market using weekly data from 1999 to 2006. In our empirical specification, we utilize and extend the multivariate GARCH-M framework of De Santis and Gérard (1998), by allowing conditional local influence as well. Similar to them we find global risk to be time-varying. Currency risk also found to be priced and highly time varying in the Russian market. Moreover, our results suggest that the Russian market is partially segmented and local risk is also priced in the market. The model also implies that the biggest impact on the US market risk premium is coming from the world risk component whereas the Russian risk premium is on average caused mostly by the local and currency risk components.

• Item Type: MPRA Paper
• Institution: Lappeenranta University of Technology, School of Business
• Language: English
• Keywords: international asset pricing models; segmentation; currency risk; multivariate GARCH-M; Russia
• Subjects: G - Financial Economics > G1 - General Financial Markets > G12 - Asset Pricing ; Trading Volume ; Bond Interest Rates; F - International Economics > F3 - International Finance > F30 - General; G - Financial Economics > G1 - General Financial Markets > G15 - International Financial Markets

References

Adler, M., Dumas, B., 1983. International portfolio selection and corporation finance: A synthesis. Journal of Finance 38, 925-984. Akram, Q. F., 2004. Oil prices and exchange rates: Norwegian evidence. The Econometrics Journal 7(2), 476-504 Amano, R. A., Simon, V. N., 1998. Exchange Rates and Oil Prices. Review of International Economics 6(4), 683-694 Anatolyev, S., 2005. A ten-year retrospection of the behavior of Russian stock returns. Bank of Finland, BOFIT Discussion Papers 9. Antell, J., Vaihekoski, M., 2007. International asset pricing models and currency risk: Evidence from Finland 1970-2004. Journal of Banking and Finance 31(9), 2571-2590. Bailey, W., Chung, Y. P., 1995. Exchange Rate Fluctuations, Political Risk, and Stock Returns: Some Evidence from an Emerging Market. Journal of Financial and Quantitative Analysis 30(4), 541-561. Bergvall, A., 2004. What Determines Real Exchange Rates? The Nordic Countries. The Scandinavian Journal of Economics 106(2), 315-337 Bekaert, G., Harvey, C., 1995. Time–varying world market integration. Journal of Finance 50, 403-444. Berndt, E., Hall, B., Hall R., Hausman, J., 1974. Estimation and inference in nonlinear structural models. Annals of Economic and Social Management 3(4), 653–665. Bollerslev, T., Chou R.Y., Kroner, K.F., 1992. ARCH Modeling in Finance. Journal of Econometrics 52, 5-59. Bollerslev, T., Engle, R.F., Nelson, D., 1994. Arch models. In: Engle, R., McFadden, D. (eds.): Handbook of Econometrics, vol. 4. North Holland. Bollerslev, T., Engle, R.F., Wooldridge, J.M., 1988. A capital asset pricing model with time–varying covariances. Journal of Political Economy 96, 116-131. Bollerslev, T., Wooldridge, J.M., 1992. Quasi–maximum likelihood estimation and inference in dynamic models with time–varying covariances. Econometric Reviews 11, 143-172. Carrieri, F., Errunza, V., Majerbi, B., 2006. Local risk factors in emerging markets: Are they separately priced? Journal of Empirical Finance 13, 444-461. Chan, K. C., Karolyi, A. G., Stulz , R., 1992. Global Financial Markets and the Risk Premium on U.S. Equity, Journal of Financial Economics 32, 137-169. De Santis, G., Ge´rard, B., 1997. International asset pricing and portfolio diversification with time–varying risk. Journal of Finance 52, 1881-1912. De Santis, G., Gérard, B., 1998. How big is the premium for currency risk? Journal of Financial Economics 49, 375-412. De Santis, G., Imrohoroglu, S., 1997. Stock Returns and Volatility in Emerging Financial Markets. Journal of International Money and Finance 16, 561-579. Ding, Z., Engle, R. F., 2001, Large scale conditional covariance matrix modeling, estimation and testing. Academia Economic Papers 29, 157-184 Doukas, J., Hall, P. H., Lang, L. H. P., 1999. The pricing of currency risk in Japan. Journal of Banking & Finance 23, 1-20. Engle, R.F., Kroner, K., 1995. Multivariate simultaneous generalized ARCH. Econometric Theory 11, 122-150. Errunza, V., Losq, E., 1985. Internal asset pricing under mild segmentation: Theory and tests. Journal of Finance 40, 105-124. Ferson, W., Harvey, C., 1993. The risk and predictability of international equity returns. Review of Financial Studies 6, 527-566. Gérard, B., Thanyalakpark, K., Batten, J.A., 2003. Are the East Asian markets integrated? Evidence from the ICAPM. Journal of Economics and Business 55 (5-6), 585-607. Giovannini, A., Jorion, P., 1989, Time-series Tests of a Non-expected Utility Model of Asset Pricing. Columbia University, working paper. Goriaev, A., Zabotkin, A., 2006. Risks of investing in the Russian stock market: Lessons of the first decade. Emerging Markets Review 7, 380-397. Harvey, C.R., Zhou, G., 1993. International asset pricing with alternative distributional specifications. Journal of Empirical Finance 1, 107-131. Harvey, C. R., 1995. Predictable risk and return in emerging markets. Review of Financial Studies 8, 773-816. Hentschel, L., 1995. All in the family: Nesting symmetric and asymmetric GARCH models. Journal of Financial Economics 39, 71-104. Jarque, C. M., Bera, A. K., 1987. A test for normality of observations and regression residuals. International Statistical Review 55, 163-172. Jorion, P., 1990. The exchange rate exposure of U.S. multinationals. Journal of Business 63, 331-346. Jorion, P., 1991. The pricing of exchange rate risk in the stock market. Journal of Financial and Quantitative Analysis 26, 363-376. Ljung, G. M. and G. E. P. Box, 1978. On a measure of lack of fit in time series models, Biometrika 65, 297-303. Mateus, T., 2004. The risk and predictability of equity returns of the EU accession countries. Emerging Markets Review 5(2), 241-266. Merton, R., 1980. On estimating the expected return on the market. Journal of Financial Economics 8, 323-361. Nummelin, K., Vaihekoski, M., 2002. International capital markets and finnish stock returns. European Journal of Finance 8, 322-343. Phylaktis, K., Ravazzolo, F., 2004. Currency risk in emerging equity markets. Emerging Markets Review 5(3), 317-339. Roll, R., 1992. Industrial structure and the comparative behavior of international stock market indices. The Journal of Finance 47(1), 3-41. Saleem, K., Vaihekoski, M., 2007. Pricing of global and local sources of risk in Russian stock market. Forthcoming in Emerging Markets Review. doi:10.1016/j.ememar.2007.08.002 Stulz, R.M., 1995. International portfolio choice and asset pricing: An integrative survey. In: Jarrow, R.A., Maksimovic, V., Ziemba, W.T. (eds.), Handbooks in Operations Research and Management Science: Finance. North-Holland. Vaihekoski, M., 2007a. Global market and currency risk in Finnish stock market. Finnish Economic Papers 20(1), 72-88. Vaihekoski, M., 2007b. On the calculation of the risk free rate for tests of asset pricing models. Available at SSRN: http://ssrn.com/abstract=958471. Worthington, A., Higgs, H., 2004. Transmission of equity returns and volatility in Asian developed and emerging markets: a multivariate GARCH analysis. International Journal of Finance & Economics 9 (1), 71-80.