Chapter

Volatility Regimes and Global Equity Returns*

Luis Catão and Allan Timmermann

in Volatility and Time Series Econometrics

Published in print March 2010 | ISBN: 9780199549498
Published online May 2010 | e-ISBN: 9780191720567 | DOI: http://dx.doi.org/10.1093/acprof:oso/9780199549498.003.0013

Series: Advanced Texts in Econometrics

 Volatility Regimes and Global Equity Returns*

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This chapter develops a regime-switching modeling framework and applies it to 30-year-long firm-level data in order to address three main questions: whether global stock return volatility displays well-defined volatility regimes; the extent to which equity market volatility is accounted for by global, country- or sector-specific factors; and what implication this has for national equity market correlations and international risk diversification. The chapter is organized as follows. Section 1 lays out the econometric methodology, whereas Section 2 discusses the data. Section 3 provides the empirical characterization of the single and joint dynamics of country and industry portfolios, and of the global factor. Section 4 presents variance decomposition results on the relative contribution of each factor to overall stock return volatility. Section 5 provides an economic interpretation of our model characterization of the volatility states, linking it to the existing literature on the determinants of stock market volatility. Section 6 examines the within-state portfolio correlations and examines the respective implications for global risk diversification. Section 7 concludes.

Keywords: equity market volatility; risk diversification; stock return volatility; global portfolio

Chapter.  17161 words.  Illustrated.

Subjects: Econometrics and Mathematical Economics

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