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Stock price synchronicity and its effect on stock market volatility: evidence from the MENA region

Stock price synchronicity and its effect on stock market volatility: evidence from the MENA region This study investigates whether stock price synchronicity contains information regarding future stock market volatility. More specifically, this paper answers three important questions: 1) Does historic stock price synchronicity affect stock market volatility?; 2) If it does, how much of the volatility is explained by synchronicity?; 3) Does the impact of unexpected shocks on stock market volatility depend on historic synchronicity? Using the data from MENA region (Morocco, Tunisia, Egypt, United Arab Emirates, Jordan, Oman, and Bahrain), we document significantly positive relationship between stock price synchronicity and stock market volatility during the period between 2005 and 2010. We show that, whether stocks co-move downward or co-move upward, it causes stock market volatility to go up significantly. Our results are significant across all markets. We also show that synchronous component of volatility can, at times, completely explain stock market volatility. Furthermore, we also show that the impact of unexpected shocks on stock market volatility is an increasing function of stock price synchronicity. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png American Journal of Finance and Accounting Inderscience Publishers

Stock price synchronicity and its effect on stock market volatility: evidence from the MENA region

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Publisher
Inderscience Publishers
Copyright
Copyright © Inderscience Enterprises Ltd
ISSN
1752-7767
eISSN
1752-7775
DOI
10.1504/AJFA.2018.093042
Publisher site
See Article on Publisher Site

Abstract

This study investigates whether stock price synchronicity contains information regarding future stock market volatility. More specifically, this paper answers three important questions: 1) Does historic stock price synchronicity affect stock market volatility?; 2) If it does, how much of the volatility is explained by synchronicity?; 3) Does the impact of unexpected shocks on stock market volatility depend on historic synchronicity? Using the data from MENA region (Morocco, Tunisia, Egypt, United Arab Emirates, Jordan, Oman, and Bahrain), we document significantly positive relationship between stock price synchronicity and stock market volatility during the period between 2005 and 2010. We show that, whether stocks co-move downward or co-move upward, it causes stock market volatility to go up significantly. Our results are significant across all markets. We also show that synchronous component of volatility can, at times, completely explain stock market volatility. Furthermore, we also show that the impact of unexpected shocks on stock market volatility is an increasing function of stock price synchronicity.

Journal

American Journal of Finance and AccountingInderscience Publishers

Published: Jan 1, 2018

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