The Political Economy of Volatility Dynamics in the Hong Kong Stock Market

Publication Type

Journal Article

Publication Date

9-2002

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.

Discipline

Finance and Financial Management | Portfolio and Security Analysis

Research Areas

Finance

Publication

Asia-Pacific Financial Markets

Volume

9

Issue

3

First Page

259

Last Page

282

ISSN

1573-6946

Identifier

10.1023/a:1024133632104

Publisher

Springer Verlag

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