Stock return dynamics and stock market interdependencies

Abstract

This article compares stock return behaviour in mature and emerging stock markets. The role of leading markets and the impact of the October 1997 East Asian financial crisis are examined in the context of stock market interdependencies. An extended AR(1)-GARCH-M (autoregressive generalized autoregressive conditional heteroskedasticity) model is used. Potential price and volatility transmission mechanisms stemming from leading markets and potential structural breaks in mean and variance caused by the above crisis are discussed. Daily data covering the 16 April 1991 to 29 November 2001 period are used. The results reveal significant differences in stock return behaviour between mature and emerging markets and confirm substantial interdependencies among stock markets, originating from both leading and emerging markets.