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The IUP Journal of Applied Finance
Financial Crises and Stock Market Behaviors in Emerging Markets
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This study investigates the effects of the US subprime crisis and the Eurozone debt crisis on stock market behaviors in terms of the volatility of return or risk and asymmetry issues by using GARCH, E-GARCH and GARCH-M methodologies and the daily stock return series, which consists of 2,609 observations from the period June 3, 2004 to June 3, 2014 for selected emerging markets. The findings indicate that the emerging markets exhibit some common patterns in different boom and bust periods. Regardless of the region, economic size, period and the source of the crisis, the study concludes that nearly all markets have strong and significant volatility clustering in the stock return and asymmetric behaviors, which indicates that negative shocks have a greater impact on volatility than positive shocks.

 
 
 

The subprime mortgage crisis started in the US and spread rapidly to the global financial markets. This turbulence caused substantial damage to the other sectors of the real economy as well as the global financial markets. The increasing uncertainty caused a decrease in investor confidence and the postponement of investment decisions. Thus, the GDP growth rate and exports declined dramatically in both advanced and emerging markets. Although a majority of the emerging markets were affected severely, those that had strong economic fundamentals or were less integrated into the global financial markets experienced less negative effects. Nevertheless, when we look at the overall scenario, the emerging market equities index (MSCI-EM) experienced a drastic change of nearly 53% in 2008, and the net capital flow to emerging markets declined radically to one-fifth of their 2007 level in 2009. Subsequently, the European sovereign debt crisis provoked similar outcomes in the emerging markets. During these crisis periods, the financial markets in emerging countries faced unexpected changes in stock market dynamics such as the volatility of return, risk and asymmetry. Hence, because of the key role of the financial markets that may influence all the sectors in an economy, it would be useful to examine the effects and size of the financial crisis on stock market behavior. These behaviors lead the investment decisions of investors. An increase in stock market volatility is interpreted by investors as a rise in risk, and investors may change their investment positions to less risky assets. This may have changed the amount of capital flow to countries that have equity markets that are vulnerable in terms of local firms that need to fund and improve trading activities.

 
 
 

Applied Finance Journal, Financial Crises, Stock Market Behaviors, GARCH, E-GARCH, MSCI-EM, Generalized Autoregressive Conditional Heteroskedasticity (GARCH), GARCH-M, Emerging Markets.