Journal of Business & Financial Affairs

Assessing the Effects of Financial Liberalization and Global Financial Crisis on Stock Market Volatility: Evidence from Smooth-Transition GARCH Models

Abstract

Emna Bensethom*

The aim of this paper is to study the potential effects of liberalization process and global financial crisis on conditional volatility. Our sample comprises three Asian emerging markets (Philippines, Korea and Indonesia) over the period from December 1987 to September 2014.Using the ST-GARCH models, our findings show several interesting facts. First, the ST-GARCH processes perform better than the linear GARCH models, since they take into consideration the regime changes in the conditional volatility. Moreover, these models are able to absorb the nonlinear dependence and the asymmetric effects detected on the residuals. Second, whatever the nonlinear model used (ST-GARCH models), financial liberalization has reduced the conditional volatility. By cons, the global financial crisis has increased the conditional variance of the Asian stock markets. Overall, our results confirm that Asian region cannot fully benefit from financial liberalization, because the negative effects of these crises (notably in terms of financial instability) can minimize the benefits of this process (integration).