The Political Economy of Volatility Dynamics in the Hong Kong Stock Market |
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Authors: | Wai Mun Fong Seng Kee Koh |
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Affiliation: | (1) Department of Finance and Accounting, National University of Singapore, 1 Business Link, Singapore, 117592;(2) Department of Finance and Accounting, Singapore Management University, Singapore |
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Abstract: | Despite its obvious importance, little empirical research has examined the impact of political risk on stock market volatility. This paper uses data on the Hong Kong stock market over a long sample period to investigate whether political risk has induced regime shifts in stock market volatility. Regime shifts are modelled via a Markov switching EGARCH model that allows for regime-dependent volatility asymmetry. We find strong evidence of regime shifts in conditional volatility as well as significant volatility asymmetry in high volatility periods. Major political uncertainties were reflected in a switch to the high-volatility regime. However, contrary to popular perceptions, we find no evidence that the Hong Kong stock market has become persistently more volatile since the start of Sino-British political negotiations in 1982. |
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Keywords: | leverage effect and political risk regime switching volatility |
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