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A comparison of developed and emerging equity market return volatility at different time scales

A comparison of developed and emerging equity market return volatility at different time scales Purpose – The purpose of this paper is to examine the volatility of daily returns in a sample of developed and emerging equity markets at different time scales through wavelet decomposition. Such information is vital for international investors who have different time horizons for their investment decisions and trading strategies. Design/methodology/approach – The wavelet technique used here allows the return series to be viewed at different frequency by decomposing the series into different time horizons known as time scales. The decomposed return series enable investigation of return variability at different return intervals. Findings – In an analysis at different time scales, there is no evidence to suggest that the return dynamics of developed and emerging markets are different. In both types of markets, return variance is time scale dependent, satisfying a pure power law process, and the variability in returns is more likely to be due to the dynamics at the lower time scales. While emerging markets generally exhibit a higher level of volatility, the relative contribution from each time scale is quite similar to that of the developed markets. Originality/value – The difference in the return dynamics between emerging and developed markets is observed at the lowest time scale. This is an indication that differences in the return dynamics between the two types of markets may be more likely in the short term (high frequency) rather than in the long term. A plausible reason for this is speculative trading. Such information is vital for international investors who have different time horizons for their investment decisions and trading strategies. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Managerial Finance Emerald Publishing

A comparison of developed and emerging equity market return volatility at different time scales

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Publisher
Emerald Publishing
Copyright
Copyright © 2011 Emerald Group Publishing Limited. All rights reserved.
ISSN
0307-4358
DOI
10.1108/03074351111161592
Publisher site
See Article on Publisher Site

Abstract

Purpose – The purpose of this paper is to examine the volatility of daily returns in a sample of developed and emerging equity markets at different time scales through wavelet decomposition. Such information is vital for international investors who have different time horizons for their investment decisions and trading strategies. Design/methodology/approach – The wavelet technique used here allows the return series to be viewed at different frequency by decomposing the series into different time horizons known as time scales. The decomposed return series enable investigation of return variability at different return intervals. Findings – In an analysis at different time scales, there is no evidence to suggest that the return dynamics of developed and emerging markets are different. In both types of markets, return variance is time scale dependent, satisfying a pure power law process, and the variability in returns is more likely to be due to the dynamics at the lower time scales. While emerging markets generally exhibit a higher level of volatility, the relative contribution from each time scale is quite similar to that of the developed markets. Originality/value – The difference in the return dynamics between emerging and developed markets is observed at the lowest time scale. This is an indication that differences in the return dynamics between the two types of markets may be more likely in the short term (high frequency) rather than in the long term. A plausible reason for this is speculative trading. Such information is vital for international investors who have different time horizons for their investment decisions and trading strategies.

Journal

Managerial FinanceEmerald Publishing

Published: Aug 30, 2011

Keywords: Volatility; Wavelet decomposition; Time scales; Developed markets; Emerging markets

References