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The Political Economy of Volatility Dynamics in the Hong Kong Stock Market

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Abstract

Despite its obvious importance, little empirical research has examined the impact of political risk on stock market volatility. This paper uses data on the Hong Kong stock market over a long sample period to investigate whether political risk has induced regime shifts in stock market volatility. Regime shifts are modelled via a Markov switching EGARCH model that allows for regime-dependent volatility asymmetry. We find strong evidence of regime shifts in conditional volatility as well as significant volatility asymmetry in high volatility periods. Major political uncertainties were reflected in a switch to the high-volatility regime. However, contrary to popular perceptions, we find no evidence that the Hong Kong stock market has become persistently more volatile since the start of Sino-British political negotiations in 1982.

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Authors and Affiliations

  1. Department of Finance and Accounting, National University of Singapore, 1 Business Link, Singapore, 117592

    Wai Mun Fong

  2. Department of Finance and Accounting, Singapore Management University, Singapore

    Seng Kee Koh

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  1. Wai Mun Fong
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  2. Seng Kee Koh
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Fong, W.M., Koh, S.K. The Political Economy of Volatility Dynamics in the Hong Kong Stock Market. Asia-Pacific Financial Markets 9, 259–282 (2002). https://doi.org/10.1023/A:1024133632104

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