Forecasting volatility in Asian stock markets: Contributions of local, regional, and global factors

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Journal Article
Asian Development Review, 2011, 28 (2), pp. 32 - 57
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This paper examines volatility forecasting for the broad market indices of 12 Asian stock markets. After considering the long memory in volatility and volatility jumps, the paper incorporates local, regional, and global factors into a heterogeneous autoregressive model for volatility forecasting. Compared to several existing studies, the model produces smaller forecasting errors. The empirical findings shed new light on the spillover effect from regional and global factors to local market volatility. Despite the common perception of increased globalization, the paper finds that volatility in Asia is primarily driven by local factors. During the period January 2005 to April 2010, regional and global factors explain 2%-3% of the volatility in the next 10 days for Asian emerging markets, and 3%-6% for Asian developed markets. There was no significant increase in the contribution of global factors to local market volatility. © 2011 Asian Development Bank.
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