Abstract
The current paper aims at studying the volatility of thirteen stock markets returns (mature and emerging) by means of ARCH models in order to see its effects on the potential gains of international diversification. Then, we identify the effects of the volatility's temporal variation on the international correlation of stock markets.
The empirical results show that an ARCH effect exists for all the returns series and that volatility is persistent and asymmetrical according to the shock nature. Moreover, the volatility spillover, which is important for the mature stock markets, is checked for the majority of stock markets indices. Indeed, we observe the contagion effect which negatively affects the potential gains of international portfolio diversification. The assumption stipulating the increase of a coefficient correlation in time of high volatility, which reduces the benefit of international diversification, is confirmed for the majority of markets.
The current paper aims at studying the volatility of thirteen stock markets returns (mature and emerging) by means of ARCH models in order to see its effects on the potential gains of international diversification. Then, we identify the effects of the volatility's temporal variation on the international correlation of stock markets. The empirical results show that an ARCH effect exists for all the returns series and that volatility is persistent and asymmetrical according to the shock nature. Moreover, the volatility spillover, which is important for the mature stock markets, is checked for the majority of stock markets indices. Indeed, we observe the contagion effect which negatively affects the potential gains of international portfolio diversification. The assumption stipulating the increase of a coefficient correlation in time of high volatility, which reduces the benefit of international diversification, is confirmed for the majority of markets.
Characterized by its integration and a reduction into the international financial investment barriers during the last decades, the international financial market situation encouraged the investors to distribute their wealth between several stock exchange markets. At this level, we can say that such an investment aims at a better widening of the financial markets. This release was characterized by the progressive lifting of various barriers to the foreign investment and by the suppression of capital movement restrictions, where the intervention of international diversification serves to improve the profitability of various financial assets rather than the domestic diversification.
For that, international investment has been regarded for a long time as a means to reduce and distribute the total risk of the financial portfolios by encouraging investment in companies belonging to different industrial branches. The reduction of the risks will be actually stronger mainly when the national economic situations are more and more different and disconnected. Hence, a fall in a stock exchange market is met by a rise in another stock exchange market.
