Common volatility analysis in emerging stock markets

Abstract

This paper investigates whether emerging equity markets share a common volatility component and reexamines the major events that have most affected these markets over the past two decades. Common volatility is defined as the exposure of financial assets/markets to common shocks in volatility that simultaneously affect a broad range of these assets or markets. We measure regional COVOL as an indicator of regional common risk and its factor loadings for emerging markets. Our empirical results indicate that COVID-19, major geopolitical events (Brexit, the US tax policy in 2025, and the ongoing Russia-Ukraine war), and global economic events (the 2008 GFC and oil market-related shocks) exert the strongest influence on the co-movement of emerging markets. Countries in the Middle East exhibit the highest exposure to regional COVOL, suggesting that investment diversification in these markets is relatively less effective at the regional level. Meanwhile, China, South Africa, and Hungary exhibit lower sensitivity.