Theses and Dissertations - UTB/UTPA

Date of Award


Document Type


Degree Name

Doctor of Philosophy (PhD)


Business Administration

First Advisor

Dr. Gökçe A. Soydemir

Second Advisor

Dr. Jose Pagan

Third Advisor

Dr. Teofilo Ozuna


The rapid growth of capital markets in developing countries has come as a major event in recent financial history. According to the International Finance Corporation (IFC), portfolio flows to emerging countries has kept rising since the early 1980s and the trend has continued even after a number of financial crises (IFC, 2000). Probably one of the most commonly known characteristics of these markets is their high volatility compared to the more developed markets. But results of studies on volatilities in these markets are often based on estimates of the variance of market indexes or asset returns over relatively long periods with little attention given to the fundamentals driving the estimates. This dissertation investigates whether key macroeconomic indicators like exchange rates, interest rates, industrial production and money supply in each country are related to stock return volatility. The MSCI world index and the U.S. 3-month T-Bill are also included to proxy the effects of global variables and to better understand the determinants or causes of stock return volatility.

It has been suggested in the finance literature that stock markets in emerging and developed countries are sensitive to macroeconomic news, and financial market participants tend to follow closely governments' release of economic data and announcements of policy changes. However, there exists a large gap in the empirical identification of the macroeconomic variables affecting volatility and the few studies that document such relationships have typically focused on developed markets.

Using exponential GARCH and vector autoregressive (VAR) models, this dissertation investigates the relationship and contributes to the literature in three different ways. First it investigates whether the mean effects and volatility shocks of macroeconomic variables are transmitted to emerging stock markets. Second, it investigates whether the relative effects of country and global macroeconomic factors are different in explaining volatility of expected returns in these countries. Lastly, the dissertation investigates whether macroeconomic shocks have any significant asymmetric effects on the return volatility. The empirical results show that the shocks from both the country and global factors are transmitted to the markets at varying magnitudes. There are differences across countries in terms of the significance of domestic macroeconomic variables as determinants of mean stock returns and volatility. The differences in the response of the different markets are consistent with the underlying economic environment in each country as well as the trade and financial links with the rest of the world.

The empirical results also show that the stock markets in these countries react asymmetrically to volatility shocks from macroeconomic variables, and thus suggest evidence of the “leverage effect” found in other studies. These findings may have important implications for decision-making by investors and national policymakers.

Unlike previous studies that attribute market volatility to irrational behavior of investors, this dissertation finds that macroeconomic variables are very important in explaining market volatility. International investors can therefore improve their portfolio performance by considering the stability in economic fundamentals as determinants of stock market volatility. Policymakers can concentrate their efforts to attain stability in economic fundamentals in order to reduce volatility and minimize investor uncertainty. Both domestic and external factors are important and should be given attention by investors and policymakers. Also, investors and policy makers should be sensitive to the asymmetric ripple effects of volatility in these markets.


Copyright 2002 Benjamin Adam Abugri. All Rights Reserved.

Granting Institution

University of Texas-Pan American