Have World, Country, and Industry Risks Changed over Time? An Investigation of the Volatility of Developed Stock Markets

Abstract

This paper uses a volatility decomposition method to study the time-series behavior of equity volatility at the world, country, and local industry levels. Between 1974 and 2001, there is no noticeable long-term trend in any of the volatility measures. Then in the 1990s there is a sharp increase in local industry volatility compared to market and country volatility. Thus, correlations among local industries have declined. More assets are needed to achieve a given level of diversification, and there is more of a penalty for not being well diversified by industry. Local industry volatility leads the other volatility measures.

The degree of financial liberalization and aggregated stock-return volatility in emerging markets

“…Ferreira and Gama use this approach to study the behavior of stock-return volatility from the perspective of a global investor. The results of both Campbell et al (2001) and Ferreira and Gama (2005) emerge from separate adjusted models that occur at the same time, which may be restrictive. 7 We extend the method of volatility decomposition introduced by Campbell et al (2001) to a modified market model, where the returns of both the global market portfolio and the local market portfolio drive the return on stock i of country l in period t.…”

International Stock Return Comovements

“…Consequently, our results are consistent with recent results for the US stock market by Brandt et al (2005) and cast doubt on the many efforts to "explain" the trend in idiosyncratic behavior. 17 Ferreira and Gama (2005) adopt CLMX's methodology and apply it to country-industry portfolios. They find no evidence of a trend in the idiosyncratic variance at the local industry portfolio level.…”

A Study of Financial Integration and Optimal Diversification Strategy in ASEAN Equity Markets

“…Using rolling 12-month average of country and industry effect, this study could examine how both country and industry effects have changed over time, particularly when regionalization effort intensifies and great economic shocks occurs. Our paper follows similar methods with Ferreira and Gama (2005) that use backward 12-month moving averages trend and Marcelo et al (2013) which utilize 52-week moving average Mean Absolute Deviation (MAD).…”