Financial Liberalisation and Stock Market Volatility: The Case of Indonesia

This paper examines the relationship between financial liberalisation and stock market volatility in Indonesia. By looking at the time series properties of the Jakarta Composite Index (JCI) we identify breaks in stock market volatility which coincide with the timing of major policy events. Our main findings are (i) a significant decrease in volatility after the "official" opening of the stock market to foreign participation; (ii) a significant increase in volatility in the year before market opening following reforms that eased entry requirements and the issuance of brokerage licenses; and (iii) a significant increase in volatility at the time of the Asian crisis followed by a significant decrease in the second and sixth years after the crisis.financial liberalisation; stock market volatility; Indonesia; Asian crisis.

Financial Liberalisation and Breaks in Stock Market Volatility

This paper proposes a new statistical procedure which aims at providing robust estimates of volatility around official liberalisation dates, by using data driven techniques to identify the number and timing of structural breaks in the variance dynamics of stock market returns. The paper illustrates the usefulness of the procedure by providing an empirical application that focuses on five East Asian emerging markets, all of which liberalised their financial markets in the late 1980s or early 1990s, namely (South) Korea, Malaysia, Philippines, Taiwan and Thailand. It is shown that (i) the detected breakdates in the volatility of stock market returns do not correspond to official liberalisation dates and (ii) the use of official liberalisation dates as breakdates is likely to result in inaccurate inference. By using data driven techniques to detect multiple structural changes a richer - and inevitably more accurate - pattern of volatility dynamics emerges in comparison to focussing on official liberalisation dates.

Purchasing power parity and structural instability in the US/UK exchange rate

The aim of this study is to determine if nonlinearities have affected purchasing power parity (PPP) since 1885. Also using recent advances in the econometrics of structural change we segment the sample space according to the identified breaks and look at whether the PPP condition holds in each sub-sample and whether this involves linear or non-linear adjustment. Our results suggest that during some sub-periods, PPP holds, although whether it holds or not and whether the adjustment is linear or non-linear, depends primarily on the type of exchange rate regime in operation at any point in time

Can black swans be tamed with a flexible mean-variance specification?

We examine the homogeneity of the highly improbable returns, what practitioners and the mainstream economic press also call black swan events. By setting up a simple framework and using the benchmark stock market indices of all OECD countries, we find that the frequency of black swans varies greatly over the last two decades often with dramatic changes that can be related to major economic events. Moreover, during the global financial crisis, black swans were substantially more frequent for most countries even after controlling for the level of volatility. This implies that, despite the plethora of appropriate financial instruments to counter this effect, during an obvious economic turmoil, stock markets are still more likely to experience highly improbable events

Financial liberalisation and stock market volatility: the case of Indonesia

This paper examines the relationship between financial liberalisation and stock market volatility in Indonesia. By looking at the time series properties of the Jakarta Composite Index (JCI) we identify breaks in stock market volatility which coincide with the timing of major policy events. Our main findings are (i) a significant decrease in volatility after the "official" opening of the stock market to foreign participation; (ii) a significant increase in volatility in the year before market opening following reforms that eased entry requirements and the issuance of brokerage licenses; and (iii) a significant increase in volatility at the time of the Asian crisis followed by a significant decrease in the second and sixth years after the crisis

Brexit means inward investment to the UK will fall

Supply chains cross borders many times before components go into a final product in any EU country, write David Bailey, Nigel Driffield and Michail Karoglou. When the UK leaves the Single Market, it will be a less attractive destination for firms wanting to coordinate their resources. The devaluation of sterling also lowers the expected returns from UK investment when translated into the home country’s currency

With Brexit, inward investment will fall in the UK

Supply chains cross borders many times before components go into a final product in any EU country, write David Bailey, Nigel Driffield and Michail Karoglo

Estimating the Impact of Credit Risk Determinants in two Southeast European Countries: A Non-Linear Structural VAR Approach.

We study the impact of credit risk determinants on the Romanian and Bulgarian banking systems using a structural Markov Regime-Switching vector autoregressive (MRS-SVAR) analysis. To capture changes in the domestic macroeconomic conditions as well as the spillover effects from the Greek crisis we account for endogenous breaks in the mean and/or volatility dynamics. Our empirical results suggest that an increase of interest rate also increases the Romanian and Bulgarian credit risk in the short-run while in the medium and long-run it reduces it. We also find evidence of spillover effects from the Greek crisis on both the Romanian and Bulgarian banking system, which interestingly, are imminent in the low volatility regime

Can Black Swans be tamed with a flexible Mean-Variance specification?

We examine the homogeneity of the highly improbable returns, what practitioners and the mainstream economic press also call black swan events. By setting up a simple framework and using the benchmark stock market indices of all OECD countries, we find that the frequency of black swans varies greatly over the last two decades often with dramatic changes that can be related to major economic events. Moreover, during the Global Financial Crisis black swans were substantially more frequent for most countries even after controlling for the level of volatility. This implies that, despite the plethora of appropriate financial instruments to counter this effect, during an obvious economic turmoil stock markets are still more likely to experience highly improbable events

Monetary variability and monetary variables in the Franc zone

Failure to detect or account for structural changes in economic modelling can lead to misleading policy inferences, which can be perilous, especially for the more fragile economies of developing countries. Using three potential monetary policy instruments (Money Base, M0, and Reserve Money) for 13 member-states of the CFA Franc zone over the period 1989:11-2002:09, we investigate the magnitude of information extracted by employing data-driven techniques when analyzing breaks in time-series, rather than the simplifying practice of imposing policy implementation dates as break dates. The paper also tests Granger's (1980) aggregation theory and highlights some policy implications of the results