Rev Quant Finan Acc (2006) 27:125–142
DOI 10.1007/s11156-006-8793-4
Modelling return and conditional volatility exposures
in global stock markets
Charlie X. Cai · Robert W. Faff · David J. Hillier ·
Michael D. McKenzie
C
Springer Science + Business Media, LLC 2006
Abstract This article empirically investigates the exposure of country-level condi-
tional stock return volatilities to conditional global stock return volatility. It provides
evidence that conditional stock market return volatilities have a contemporaneous as-
sociation with global return volatilities. While all the countries included in the study
exhibited a significant and positive relationship to global volatility, emerging market
volatility exposures were considerably higher than developed market exposures.
Keywords Conditional volatility exposures
.
Emerging market risk
.
GARCH
modelling
JEL Classification G12
1. Introduction
The intertemporal properties of asset return volatility have been widely investigated
across an extensive body of literature. Of greatest interest and relevance in the current
context, is that subset of papers that examine Factor-ARCH. The Factor-ARCH model
suggests that multivariate models of conditional volatility can be dramatically sim-
plified by specifying a common source of volatility (see, for example, Engle, 1987;
C. X. Cai · R. W. Faff · D. J. Hillier
Leeds University Business School, Maurice Keyworth Building, The University of Leeds,
Leeds, LS2 9JT, United Kingdom
R. W. Faff (
)
Department of Accounting & Finance, Monash University, Victoria 3800, Australia
e-mail: robert.faff@buseco.monash.edu.au
M. D. McKenzie
School of Economics and Finance, RMIT University, GPO Box 2746V, Melbourne, Australia, 3001
Springer
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