The Volatility and Correlations of Stock Returns of Some Crisis-Hit Countries: US, Greece, Thailand and Malaysia: Evidence from MGARCH-DCC applications

Masih, Mansur and Majid, Hamdan Abdul (2013): The Volatility and Correlations of Stock Returns of Some Crisis-Hit Countries: US, Greece, Thailand and Malaysia: Evidence from MGARCH-DCC applications.

Abstract

This paper investigates the volatility and correlations of stock returns of some crisis-hit countries such as, US, Greece, Thailand and Malaysia during the major global financial crises since 1992. The paper makes an attempt to address the following two issues: Firstly, to measure the extent of volatility of the stock indices under study and also the correlation of the Malaysian index with the other country indices. Secondly, given the correlations, how best can a normal investor harness them to ensure maximum return in the short and the long run with a particular reference to the correlation between the Malaysian index and other country indices. The MGARCH-DCC approach is employed for the analysis. The findings tend to indicate that the investors’ behaviour converges and correlations are significantly higher across the two Asian countries in the sample. The level of volatilities of the indices’ return of all the four markets has increased significantly for the period under study. The level and magnitude of volatilities and correlations is consistently high between Malaysia and Thailand market (lowest of 0.02 in 1993 to highest of 0.65 in 1998) followed by US and Greece markets. Greece seems to be the most volatile market followed by Malaysia, US and Thailand (except for the period between 1993 and 1998). One possible explanation is that the contagion effect takes place early in the crisis and that herding behaviour dominates the latter stages of the crisis. For our second question, the apparent high correlation coefficients during crisis periods imply that the gain from international diversification by holding a portfolio consisting of diverse stocks from these contagion countries declines, since these stock markets are commonly exposed to systematic risk(beta). An increasing integration and stronger co-movement among stock markets will result in decreasing opportunity to gain from portfolio diversification.

• Item Type: MPRA Paper
• Language: English
• Keywords: Volatility, Correlations, portfolio diversification, MGARCH-DCC
• Subjects: C - Mathematical and Quantitative Methods > C2 - Single Equation Models ; Single Variables > C22 - Time-Series Models ; Dynamic Quantile Regressions ; Dynamic Treatment Effect Models ; Diffusion Processes; C - Mathematical and Quantitative Methods > C5 - Econometric Modeling > C58 - Financial Econometrics; G - Financial Economics > G1 - General Financial Markets > G11 - Portfolio Choice ; Investment Decisions; G - Financial Economics > G1 - General Financial Markets > G15 - International Financial Markets

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