EMERGING EQUITY MARKET VOLATILITY

Understanding volatility in emerging capital markets is important for determining the cost of capital and for evaluating direct investment a nd asset allocation decisions. We provide an approach that allows the relative importance of world and local information to change through t ime in both the expected returns and conditional variance processes. O ur time-series and cross-sectional models analyze the reasons that vol atility is different across emerging markets, particularly with respec t to the timing of capital market reforms. We find that capital market liberalizations often increase the correlation between local market r eturns and the world market but do not drive up local marker volatilit y.