STOCK MARKETS LIBERALIZATION AFFECTS VOLATILITY?

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1 Year XII, No.14/01 45 STOCK MARKETS LIBERALIZATION AFFECTS VOLATILITY? Lec. Ioan Aln NISTOR, PhD Mara-Lenuţa CIUPAC-ULICI, PhD Babeş-Bolya Unversy, Clu Naoca Mrcea-Crsan GHERMAN, PhD. Suden Tehncal Unversy of Clu Naoca 1. Inroducon Modern fnancal heory shows ha he volaly of fnancal asses should be analyzed n order o buld effcen orfolos. Volaly dedcaed concern s he fac ha nvesmen decsons deend no only on he execed reurns, bu also he rsks of varous asses comrsng he orfolo. In he emergng markes feld, sock marke volaly ssues rase a lo of uesons. Sock marke lberalzaon may lead o an mrovemen n nformaon effcency, bu hs s no sasfacory f s accomaned by excessve marke volaly, or even a fnancal crss.thus, alhough we can confrm ha he exsence of a weak form effcency n mos emergng markes n he long run, s also moran o analyze he fnancal mac of fnancal deregulaon on sock marke volaly. Ths argumen s nonsense, because curren sudes of fnancal heory sugges no clear relaonsh beween effcency and volaly. Indeed, n an effcen marke, volaly may ncrease or decrease due o he arrval of new nformaon. The curren debae on marke volaly, we focus on he asecs lsed below: marke volaly has wo man feaures. I vares over me and seems o reac srongly o olcal and economc urmol. Then, seems o have a long memory (erssen). In oher words, a seres of reurns ha has been volale n he as should be he same oday and omorrow. he leraure offers dfferen nerreaons of he level of marke volaly. Some beleve ha marke volaly s relaed o characerscs of frms, such as rae of reurn, dvdend rae and fnancal erformance [Schwer (1989)]. Oher auhors such as Soll and Whaley (1990) aem o oban exlanaons by sudyng he mcrosrucure of sock markes (exchange rae mechansm, rcng, nformaon srucure, ec.). In addon, based on models rovded by behavoral fnance, Shller (1990) argues ha volaly s caused by some sychologcal ras of nvesors, n arcular, overconfdence and mmesm. Bekaer and Harvey (1997) realze he me-seres sudy of 17 markes usng monhly me and hey fnd ha reduce volaly lberalzaon rocess. In her aer from 000, hey made a sudy found on 0 emergng markes ha here s a small nsgnfcan bu mosly Increase n volaly followng and lberalzaons rocess. Kwan and Reyes (1997) fnd sock marke lberalzaon n Tawan ha reduces volaly sgnfcanly. Ths resul concdes wh Tha Obaned by Cuñado e al. (006) and Dhr (007). De Sans and Imrohoroglu (1997) denfed ha here s no obvous relaonsh beween lberalzaon and sock marke volaly. The aame resul obans and Bellalah Nguyen (008). Koo and Padmanabhan (1993), Levne and Zervos (1998), Mles

2 46 Fnance Challenges of he Fuure (00) and Jayasurya (005) found sgnfcanly hgher ha s volaly n he erod afer lberalzaon.. Samle daa and s sascal characerscs To es varous asecs of sock exchange ndces, followng he mlemenaon of he lberalzaon rocess of caal markes, we use daly closng daa of sx ndces relaed o Euroean emergng caal markes: Hungary (BUX), Poland (WIG), Czech (PX), Slovena (SBI), Slovaka (SAX) and Romana (BET) (Table 1).Analyzed me begns wh he frs day of ublcaon of each ndce and end on June 30, 011 (exce for sock ndex of Slovena). All closng values of hese ndces are colleced from Daasream daabase and are denomnaed n local currency. We analyzed he sock marke volaly, before and afer lberalzaon rocess. Breakng on we consdered he offcal dae of lberalzaon of caal markes (Table no. 1). Table no. 1. The samle analyzed ndexes Indces Analyzed erod Offcal dae of lberalzaon BET 19 Se Jun. 011 January 006 BUX Jan Jun. 011 July 001 PX 7 Se Jun. 011 January 001 SAX 3 Jul Jun. 011 January 001 SBI 3 Jan Oc. 010 January 00 WIG 16 Ar Jun. 011 January 001 Source: Auhor`s calculaons Based on hese daa we calculaed he daly logarhmc reurns usng he closng rces of each radng day. The man descrve sascs of daly logarhmc reurn seres corresondng o he sx analyzed ndces for he erod from he frs day of lsng unl 30 June 011 are resened n Table. Noe ha he mean reurn seres are osve n all markes examned, o he exremes beng laced Poland (0.084%) and Slovaka (0.007%).A frs argumen ha reurns do no follow a normal dsrbuon law s gven by he Kuross coeffcen (have hgher values of 3), whch means ha he dsrbuon s leokurc, whch s much less shar han he normal dsrbuon, and by he asymmery coeffcen (Skeweness) whch s dfferen from zero ndcang a lef asymmery (exce Czech Reublc), e he lef al s longer. The second argumen ha he dsrbuon of daly sock marke reurns do no follow a normal dsrbuon law s gven by he value of Jarue-Bera es. The resence of elongaed als due o he fac ha he arrved nformaon on he marke needs me o be ncororaed under hs generang he behavor of cluser reurns whch ranslae no a leocurc dsrbuon of hem.

3 Year XII, No.14/01 47 Table no.. Descrve sascs for he logarhmc reurn ndces Indces No. observaons Meda Medan Maxmum Mnmum Sandard devaon Skewness Kuross Jarue-Bera Probably Reurn ndces reman osve boh before lberalzaon (exce Slovaka) and afer comleon of he rocess (exce Romana), also reurns have hgher values recorded for he enre erod. Kuross coeffcens reman hgher han he value of hree, herefore he dsrbuons are leokurc, and hese do no follow he normal law (accordng o Jarue-Bera es). Before he mlemenaon rocess, only dsrbuons of BET and PX reurn ndces have a rgh asymmery, and for he oher ndces he dsrbuon remans have a lef elongaed al. Afer comleng he rocess all ndces have negave values of he asymmery coeffcens. 3. Emrcal resuls on he mac of fnancal lberalzaon on volaly In order o analyze he exsence of deendences n reurn seres we used he model ARMA (,). Esablshng ARMA model was based on hree crera: Akake nformaon crera (AIC), Lung-Box sascs and he analyss of correlogram of resduals. ARMA model wh he smalles value of AIC for whch he oremaneau es does no show sgnfcan resuls, s used o remove he lnear srucure of sock reurn seres. These srucures were removed n he case of hree ndces: BET, PX and SAX. McLeod-L es sascs of suared resduals s sgnfcan o 1%, whch ndcaes he resence of nonlnear deendences n he reurn seres of ndces (Table no. 3). Table no. 3. The ARMA (,) model Model ARMA(1,0) ARMA(1,0) ARMA(4,0) ARMA(0,0) ARMA(,0) ARMA(8,0) R AC Q s(5) * Q s(10) * ** Q ss(5) 589.7* 1194* 187.3* * 187.1* Q ss(10) * * * * * 409.6* Noe: R s he deermnaon coeffcen, AIC s he Akake nformaon crera, Q s (k) s he Lung- Box es sasc, Q ss (k) s he McLeod-L es sascs.

4 48 Fnance Challenges of he Fuure To analyze he mac of lberalzaon on reurn volaly of he sx ndces, we use GARCH es where we nroduced a dummy varable relaed o lberalzaon. Thus, he GARCH model shows: 1 1 D where D s he dummy varable ha akes he value zero for he relberalzaon erod, resecvely one for os-lberalzaon erod. The resuls of Table no. 4 shows ha fnancal lberalzaon has a osve mac on sock marke volaly n Hungary and Czech Reublc sock markes, resecvely a negave mac on he Poland caal marke volaly. Table no. 4. The GARCH (,) model MODEL GARCH(3,1) GARCH(,1) GARCH(1,1) GARCH(,1) GARCH(4,1) GARCH(,1) α * * * * * * α * * * * *** α * * - α * - β * * * * * * Σα + Σβ Q ss(5) Q ss(10) Dummy * * * Noe: Q ss (k) s he McLeod-L sascs. *, ** And *** reresen sgnfcance level of 1%, 5% and 10%. As ar of lnear deendences have been removed, s necessary o consder wheher he reurn seres are resen nonlnear deendences, oo. For hs we aled he BDS es on sandardzed resduals of GARCH model. Probables resulng from BDS es are above he hreshold of acceance of he null hyohess, of 10%, only for he Poland sock marke ndce reurn seres, whch means ha he sandardzed resduals of GARCH (,1) model are ndeenden and dencally dsrbued. Nonlnear deendences D reman n he oher reurn seres. The erssence of volaly shocks nduced (Σα +Σβ ) seems o be ermanen, because he values are close o uny.therefore we aled he Inegraed GARCH es.igarch model mahemacal exresson looks as follows: 1 1 Ths relaonsh s smlar o a GARCH model. For hs model o be an IGARCH model, mus fulfll he followng condon: Snce we nroduced he dummy varable n he IGARCH model oo, relaonsh model calculaon wll be: 1 1 D Accordng o Table no. 5, fnancal lberalzaon has a osve mac on reurn volaly for ndces n Hungary, Czech Reublc, Poland and Slovaka. For he oher wo sock markes he mac s nsgnfcan.

5 Year XII, No.14/01 49 Table no. 5. The IGARCH model Model IGARCH(3,1) IGARCH(,1) IGARCH(1,1) IGARCH(,1) IGARCH(4,1) IGARCH(,1) α * * * * * * α * * * * * α * * α β * * * * * * Σα + Σβ Q ss(5) Q ss(10) Dummy * * * * Noe: Q ss (k) s he McLeod-L sascs. We aled he BDS es on he sandardzed resduals of IGARCH model, oo. Exsence of nonlnear deendence roblems do no dsaear.comared wh obaned resuls by alyng he BDS es on sandardzed resduals of GARCH model ndcaes ha fewer nonlnear deendences were removed. The fnancal crss ha began n he Uned Saes, on he rme morgage marke n 007 uckly sread across Euroe no a global crss affecng he world fnancal sysems and economc acvy n almos all counres. Global fnancal urmol has caused a dee crss n several emergng Euroean markes. The grahcs of rollng wndows mehodology show an ncrease n volaly due o he occurrence of fnancal crss n emergng markes. Therefore we aled he GARCH and IGARCH models on he me ha dsregard he corresondng erod of he crss. Thus, analyzed erods are: 1 July July 3, 007 (Hungary), 1 January June 7, 007 (Poland), January 1, Ocober 007 (Czech Reublc), January 1, Augus 007 (Slovena), 1 January March 6, 008 (Slovaka) and 1 January Augus 5, 008 (Romana). Alyng ARMA model we oban lower values for AIC. However, lnear srucures are removed only for wo sock markes (Romana, Slovaka), and nonlnear deendences reman a 1% sgnfcance level for all ndces (Table no. 6). Table no. 6. The ARMA (,) model AR model ARMA(1,0) ARMA(1,0) ARMA(,0) ARMA(0,0) ARMA(,0) ARMA(11,0) R AC Q s(5) * 0.76* Q s(10) * 5.911* * Q ss(5) 74.9* * * 151.3* * 641.9* Q ss(10) 97.16* * 1630* * * 357.* Noe: R s he deermnaon coeffcen, AIC s he Akake nformaon crera, Q s (k) s he Lung- Box es sasc, Q ss (k) s he McLeod-L es sascs. GARCH model resuls show ha fnancal lberalzaon leads o lower volaly n sock markes n Hungary, Czech Reublc and Poland (Table no. 7). By alyng he BDS es on sandardzed resduals of GARCH model, here were removed a larger number of nonlnear srucures.null hyohess s reeced by sock ndce WIG, n almos all cases, s reeced by BET and BUX ndces, and n half of he cases for PX and SAX ndces.

6 50 Fnance Challenges of he Fuure Table no. 7. The GARCH (,) model MODEL GARCH(3,1) GARCH(,1) GARCH(1,1) GARCH(4,1) GARCH(4,1) GARCH(,1) α * * * * * * α * * * * α * * * - α * * - β * * * * * * Σα + Σβ Q ss(5) Q ss(10) Dummy *** * * Noe: Q ss (k) s he McLeod-L sascs. *, ** And *** reresen sgnfcance level of 1%, 5% and 10%. The resuls of he IGARCH model show ha he lberalzaon rocess has a osve and sgnfcan mac on wo sock markes (Slovaka and Slovena). For he oher four sock markes, fnancal lberalzaon leads o a decrease volaly (Table no. 8). BDS es does no elmnae he nonlnear deendences (exce for WIG ndex). Table no. 8. The IGARCH model MODEL IGARCH(3,1) IGARCH(,1) IGARCH(1,1) IGARCH(4,1) IGARCH(4,1) IGARCH(,1) α * * * * 0.837* * α * * * * α * * - α * ** - β * * * * * * Σα + Σβ Q ss(5) Q ss(10) Dummy * * ** * ** * Noe: Q ss (k) s he McLeod-L sascs. The resuls from economerc models corresond o hose shown n he grahs obaned by alyng he rollng wndow mehodology. The resuls are conssen wh hose of Bekaer and Harvey (1997), Cuñado e al. (006) and Nguyen and Bellalah (008). 4. Conclusons A ror, would be beer for develong counres o lberalze her sock markes o allow domesc nvesors o benef from fnancal negraon, such as dversfcaon of rsk and caal cos reducon, namely o make caal markes more effcen, more lud and comeve. However, s arorae o emhasze ceran addonal measures n a revenve ersecve, agans he rsks of fnancal nsably, denfed by some auhors ha would ncrease sock marke volaly followng lberalzaon: we know ha when a marke s lberalzed, s exosed o sudden nus and ouus of caal flows.a lack of conssency n lberalzaon olces, wll resul n caal flows o become more volale, and nvesors wll ry o roec he ransfer of caal o safer laces. The volaly n caal flows wll affec he movemen of marke volaly. Therefore, o reduce volaly, he frs se and ceranly he mos moran s o ensure conssency of reform rograms.

7 Year XII, No.14/01 51 regulaory measures o avod falures n he local marke should be consdered.ths s necessary o srenghen he recondons for he roer funconng of he marke. These condons relae manly o fnancal nfrasrucure, ualy and uany of flow of dssemnaed nformaon, resecvely nvesor educaon on he naure of fnancal secures and orfolo managemen. he exen ha olcal and nsuonal sysems n develong counres do no have he maury of he develoed counres, hey should maser he ace of deregulaon, as he rad Bekaer, G., Harvey, C.R. Bekaer, G., Harvey, C.R. Cuñado, J. e al. DeSans, G. & Imrohoroglu, S. Dhr, P. Jayasurya, S. Koo, R.S. & Padmanabhan, P. Kwan, F.B. & Reyes, M.G. Levne, R. & Zervos, S. Mles, W. Nguyen, D.K. & Bellalah, M. Schwer, G.W. Shller, R. J. REFERENCES lberalzaon could cause ha local fnancal markes are hghly vulnerable o shocks exernal. However, ncreased volaly followng fnancal lberalzaon s no always a negave elemen. Ths may reflec a consoldaon of nformaon effcency of markes, whch ncreases he asse rce flucuaons a he arrval of new nformaon, due o feedback receved from nvesors. Therefore, creang a ransaren nvesmen envronmen s essenal o reduce he negave effecs of herdng behavor and lack of nvesor confdence. Emergng euy marke volaly, Journal of Fnancal Economcs, vol. 43,. 9 77, 1997; Foregn seculaors and emergng euy markes, Journal of Fnance, vol. 55, , 000; Changes n he Dynamc Behavor of Emergng Marke Volaly: Revsng he Effecs of Fnancal Lberalzaon, Faculad de Cencas Económcas y Emresarales Unversdad de Navarra, Workng Paer no.01, 006; Sock Reurns and Volaly n Emergng Fnancal Markes, Journal of Inernaonal Money and Fnance, vol. 16, , 1997; The Imac of Sock Marke Lberalzaon on Emergng Euy Marke Volaly, Honors Proecs, Paer 5, Macaleser College, 007 Sock marke lberalzaon and volaly n he resence of favorable marke characerscs and nsuons, Emergng Markes Revew, vol. 6, ssue, , 005; Sock marke lberalzaon and he dsrbuon of reurns on he Jamacan sock marke, Global Fnance Journal, vol. 4, ssue, , 1993; Prce Effecs of Sock Marke Lberalzaon n Tawan, The Quarerly Revew of Economcs and Fnance, vol. 37, , 1997; Caal Conrol Lberalzaon and Sock Marke Develomen, World Develomen, vol. 6, ssue 7, , 1998; Fnancal Deregulaon and Volaly n Emergng Euy Markes, Journal of Economc Develomen, vol. 7, ssue, , 00; Sock marke lberalzaon, srucural breaks and dynamc, changes n emergng marke volaly, Revew of Accounng and Fnance, vol. 7, ssue 4, , 008; Why Does Sock Marke Volaly Change Over Tme?, Journal of Fnance, vol. 44, ssue 5, , 1989; Marke Volaly and Invesor Behavor, Amercan Economc Revew, Paers and Proceedngs, vol. 80,. 58-6, 1990; Soll, H.R. & Program Tradng and Indvdual Sock Reurns: Ingredens of he Whaley, R.E Trle-Wchng Brew, The Journal of Busness, Unversy of Chcago Press, vol. 63, ssue 1, , 1990; ***** h://homson.banker.com/