Comparison of volatility and mean reversion among developed, developing and emerging countries

Abstract

Purpose

This research paper aims to analyze the stock exchanges of developed, emerging and developing countries to investigate the volatility in stock markets and to evaluate the rate of mean reversion.

Design/methodology/approach

The stock exchanges included in the research are NASDAQ, Tokyo stock exchange, Shanghai stock exchange, Bombay stock exchange, Karachi stock exchange and Jakarta stock exchange. Secondary daily data from Bloomberg are used to conduct the research for the period from January 2011 to December 2018. Generalized autoregressive conditional heteroskedasticity (GARCH) (1,1) model was applied to examine volatility and the half-life formula was used to calculate mean reversion in days.

Findings

The research concluded that all the stock exchanges included in the research satisfy the assumptions of mean reversion. Developing countries have the lowest volatility while emerging countries have the highest volatility which means that the rate of mean reversion is fastest in developing countries and slowest in emerging countries.

Research limitations/implications

Future studies can determine the reasons for fastest rate of mean reversion in developing countries and slowest rate of mean reversion in emerging countries.

Practical implications

Developing countries show the lowest mean reversion in days while the emerging countries show the highest mean reversion in days indicating that developing countries take less time to revert to their mean position.

Originality/value

The majority of previous studies on univariate volatility models are mostly on applications of the models. Only a few researchers have taken the robustness of the models into account when applying them in emerging countries and not in developed, developing and emerging countries in one place. This makes the current study unique and more rigorous.

Citation

Arsalan, T., Chishty, B.A., Ghouri, S. and Ansari, N.U.H. (2022), "Comparison of volatility and mean reversion among developed, developing and emerging countries", Journal of Economic and Administrative Sciences, Vol. ahead-of-print No. ahead-of-print. https://doi.org/10.1108/JEAS-01-2022-0009