Stock returns, volatility and mean reversion in emerging and developed financial markets

    Rizwan Raheem Ahmed Affiliation
    ; Jolita Vveinhardt Affiliation
    ; Dalia Štreimikienė Affiliation
    ; Saghir Pervaiz Ghauri Affiliation
    ; Muhammad Ashraf Affiliation


The objective of this research is to measure and examine volatilities between important emerging and developed stock markets and to ascertain a relationship between volatilities and stock returns. This research paper also analyses the Mean reversion phenomenon in emerging and developed stock markets. For this purpose, seven emerging markets and five developed markets were considered. Descriptive statistics showed that the emerging markets have higher returns with the higher risk-return trade-off. In contrast, developed markets have low annual returns with a low risk-return trade-off. Correlation analysis indicated the significant positive correlation among the developed markets, but emerging and developed markets have shown relatively insignificant correlation. Results of ARCH and GARCH revealed that the value of likelihood statistics ratio is large, that entails the GARCH (1,1) model is a lucrative depiction of daily return pattern, that effectively and efficiently capturing the orderly reliance of volatility. The findings of the study showed that the estimate ‘β’ coefficients given in conditional variance equation are significantly higher than the ‘α’, this state of affair entails that bigger market surprises tempt comparatively small revision in future volatility. Lastly, the diligence of the conditional variance estimated by α + β is significant and proximate to integrated GARCH (1,1) model, thus, this indicates, the existing evidence is also pertinent in order to forecast the future volatility. The results signified that the sum of GARCH (1,1) coefficients for all the equity returns’ is less than 1 that is an important condition for mean reversion, as the sum gets closer to 1, hence the Mean reversion process gets slower for all the emerging and developed stock markets.

Keyword : ARCH & GARCH, volatility, stock returns, developed & emerging stock markets, mean reversion

How to Cite
Ahmed, R., Vveinhardt, J., Štreimikienė, D., Ghauri, S., & Ashraf, M. (2018). Stock returns, volatility and mean reversion in emerging and developed financial markets. Technological and Economic Development of Economy, 24(3), 1149-1177.
Published in Issue
May 28, 2018
Abstract Views
PDF Downloads
Creative Commons License

This work is licensed under a Creative Commons Attribution 4.0 International License.


Auer, B. R. 2016. On time-varying predictability of emerging stock market returns, Emerging Markets Review 27: 1–13.

Baele, L. 2005. Volatility spillover effects in European equity markets, Journal of Financial and Quantitative Analysis 40(02): 373.

Bahloul, W.; Bouri, A. 2016. The impact of investor sentiment on returns and conditional volatility in U.S. futures markets, Journal of Multinational Financial Management 36: 89–102.

Banerjee, A.; Sarkar, S. 2006. Modeling daily volatility of the Indian stock market using intraday data, Working Paper No. 588 [online], [cited 12 April 2017]. Available from Internet:

Bartlett, M. S. 1937. Properties of sufficiency and statistical tests, Proceedings of the Royal Statistical Society Series A: Mathematical, Physical and Engineering Sciences 160(901): 268–282.

Baruník, J.; Kočenda, E.; Vácha, L. 2016. Asymmetric connectedness on the U.S. stock market: bad and good volatility spillovers, Journal of Financial Markets 27: 55–78.

Beirne, J.; Caporale, G. M.; Ghattas, M. S.; Spagnolo, N. 2013. Volatility spillovers and contagion from mature to emerging stock markets, Review of International Economics 21(5): 1060–1075.

Bekaert, G. 1995. Market integration and investment barriers in emerging equity markets, World Bank Economic Review 9(1): 75–107.

Bekaert, G.; Erb, C. B.; Harvey, C. R.; Viskanta, T. E. 1997. What matters for emerging equity market investments?, Emerging Markets Quarterly 1(2): 17–46.

Bekaert, G.; Erb, C. B.; Harvey, C. R.; Viskanta, T. E. 1998. Distributional characteristics of emerging market returns and asset allocation, Journal of Portfolio Management 24(2): 101–116.

Bekaert, G.; Harvey, C. R. 1997. Emerging equity market volatility, Journal of Financial Economics 43(1): 29–77.

Bentes, S.R. 2016. On the conditional behavior of stock market volatility: a sub-sample analysis using the FIGARCH approach for developed and emerging markets, Acta Physica Polonica A 129(5): 997–1003.

Bollerslev, T. 1986. Generalized autoregressive conditional heteroskedasticity, Journal of Econometrics 31(3): 307–327.

Borland, L. 2016. Exploring the dynamics of financial markets: from stock prices to strategy returns, Chaos, Solitons & Fractals 88: 59–74.

Bouri, E.; Demirer, R. 2016. On the volatility transmission between oil and stock markets: a comparison of emerging importers and exporters, Economia Politica 33(1): 63–82.

Cakici, N.; Tang, Y.; Yan, A. 2016. Do the size, value, and momentum factors drive stock returns in emerging markets?, Journal of International Money and Finance 69: 179–204.

Caporale, G. M.; Sousa, R. M. 2016. Consumption, wealth, stock and housing returns: evidence from emerging markets, Research in International Business and Finance 36: 562–578.

Caporale, G. M.; Spagnolo, N. 2010. Stock market integration between three CEECs, Russia and the UK, Working Paper No. 10-02 [online], [cited 25 August 2016]. Centre for Empirical Finance, Brunel University, London, UK. Available from Internet:

Cappiello, L.; Gerard, B.; Kadareja, A.; Manganelli, S. 2006. Financial integration of new EU member states, Working Paper no. 683. European Central Bank, Frankfurt.

Chelley-Steeley, P. L. 2005. Modeling equity market integration using smooth transition analysis: a study of Eastern European stock markets, Journal of International Money and Finance 24(5): 818–831.

Chen, J.; Mancini-Griffoli, T.; Sahay, R. 2014. Spillovers from United States monetary policy on emerging markets: different this time?, IMF working, No., WP/14/240. International Monetary Fund.

Chiang, T. C.; Doong, S. C. 2001. Empirical analysis of stock returns and volatility: evidence from seven Asian stock markets based on TAR-GARCH model, Review of Quantitative Finance and Accounting 17(3): 301–318.

Choi, J. H.; Kalay, A.; Sadka, G. 2016. Earnings news, expected earnings, and aggregate stock returns, Journal of Financial Markets 29: 110–143.

Choo, W. C.; Loo, S. C.; Ling, L. B.; Ung, S. N. 2011. Return and volatility spillover between large and small stocks in Bursa Malaysia, International Journal of Business and Social Sciences 2(2): 176–185 [online], [cited 26 August 2016]. Available from Internet:;_February_2011/21.pdf

Chou, R. Y.; Lin, J. L.; Wu, C. S. 1999. Modeling the Taiwan stock market and international linkages, Pacif Economic Review 4(3): 305–320.

Cifter, A.; Ozun, A. 2008. Estimating the effects of interest rates on share prices in Turkey using a multiscale causality test, Review of Middle East Economics and Finance 4(2): 68–79.

Dickey, D. A.; Fuller, W. A. 1979. Distribution of estimators for autoregressive time series with a unit root, Journal of the American Statistical Association 74(366a): 427–431.

Dickey, D. A.; Fuller, W. A. 1981. Likelihood ratio statistics for autoregressive time series with a unit root, Econometrica 49(4): 1057–1072.

Diebold, F. X.; Yilmaz, K. 2009. Measuring financial asset return and volatility spillovers, with application to global equity markets, The Economic Journal 119, 534: 158–171.

Domowitz, I.; Glen, J.; Madhavan, A. 1997. Market segmentation and stock prices: evidence from an emerging market, Journal of Finance 52(3): 1059–1085.

Égert, B.; Kočenda, E. 2007. Interdependence between Eastern and Western European stock markets: evidence from intraday data, Economic Systems 31(2): 184–203.

Engle, R. 2001. GARCH 101: The Use of ARCH/GARCH models in applied econometrics, Journal of Econometric Perspectives 15(4): 157–168.

Engle, R. F. 1982. Autoregressive conditional heteroskedasticity with estimates of the variance of UK inflation, Econometrica 50(4): 987–1007.

Engle, R. F.; Kroner, K. F. 1995. Multivariate simultaneous generalized ARCH, Econometric Theory 11(1): 122–150.

Erb, C. B.; Harvey, C. R.; Viskanta, T. E. 1997. The making of an emerging market, Emerging Markets Quarterly 1(1): 14–19.

Frugier, A. 2016. Returns, volatility and investor sentiment: evidence from European stock markets, Research in International Business and Finance 38: 45–55.

Gelos, G.; Sahay, R. 2000. Financial market spillovers in transition economies, IMF Working Paper no. 00-71.

Ghosh, S.; Saggar, M. 2016. Volatility spillovers to the emerging financial markets during taper talk and actual tapering, Applied Economics Letters 24(2): 122–127.

Ghysels, E.; Harvey, A. C.; Renault, E. 1996. Stochastic volatility, in G. Maddala, C. Rao (Eds.). Handbook of Statistics 14: 119–191.

Gilmore, C. G.; Lucey, B. M.; McCanus, G. M. 2008. The dynamics of Central European equity market co-movements, Quarterly Review of Economics and Finance 48(3): 605–622.

Gilmore, C. G.; McManus, G. M. 2002. International portfolio diversification: US and Central European equity markets, Emerging Markets Review 3(1): 69–83.

Gilmore, C. G.; McManus, G. M. 2003. Bilateral and multilateral cointegration properties between the German and Central European equity markets, Studies in Economics and Finance 21(1): 40–53.

Goetzmann, W. N.; Jorion, P. 1999. Re-emerging markets, Journal of Financial and Quantitative Analysis 34(1): 1–32.

Goudarzi, H.; Ramanarayanan, C. S. 2011. Modeling asymmetric volatility in the Indian stock market, International Journal of Business and Management 6(3).

Günay, S. 2016. Performance of the Multifractal Model of Asset Returns (MMAR): evidence from emerging stock markets, International Journal of Financial studies 4(2): 11.

Guris, S.; Sacildi, I. S. 2016. Analysis of stock return volatilities using Classical and Bayesian Stochastic volatility Models in developed and emerging markets, International Journal of Advanced Research 4(9): 2077–2089.

Hanousek, J.; Kocenda, E. 2009. Intraday price discovery in emerging European stock markets, CERGEEI Working Paper no. 382.

Hanousek, J.; Kočenda, E.; Kutan, A. M. 2009. The reaction of asset prices to macroeconomic announcements in new EU markets: evidence from intraday data, Journal of Financial Stability 5(2): 199–219.

Harris, R. D. F.; Pisedtasalasai, A. 2006. Return and volatility spillovers between large and small stocks in the UK, Journal of Business Finance & Accounting 33(9–10): 1556–1571.

Harrison, B.; Moore, W. 2010. Non-linear stock market co-movement in Central and East European Countries, Chapter published in Money, Banking and Financial Markets in Central and Eastern Europe, 119–138.

Harvey, C. R. 1995. Predictable risk and returns in emerging markets, Review of Financial Studies 8(3): 773–816.

Harvey, C. R.; Travers, K. E.; Costa, M. J. 2000. Forecasting emerging market returns using neural networks, Emerging Markets Quarterly, Summer: 1–12.

Hoque, M.; Chiou, I. 2011. The volatility transmission of stock returns across Asia, Europe, and North America, Managerial Finance 37(5): 442–450.

Hu, J. W. S.; Chen, M. Y.; Fok, R. C. W.; Huang, B. N. 1997. Causality in volatility and volatility spillover effects between US, Japan and four equity markets in the South China growth triangular, Journal of International Financial Markets, Institutions & Money 7(4): 351–367.

Jebran, K.; Iqbal, A. 2016. Dynamics of volatility spillover between stock market and foreign exchange market: evidence from Asian Countries, Financial Innovation 2(1).

Jochum, C.; Kirchgässner, G.; Platek, M. 1999. A long run relationship between Eastern European stock markets? Cointegration and the 1997/98 crises in emerging markets, Weltwirtschafliches Archiv 135(3): 455–479.

Joshi, P. 2011. Return and volatility spillovers among Asian stock markets, SAGE Open 1(1): 2.

Kambouroudis, D. S.; McMillan, D. G.; Tsakou, K. 2016. Forecasting stock return volatility: a comparison of GARCH, Implied volatility, and realized volatility models, Journal of Futures Markets 36(12): 1127–1163.

Kasman, A.; Torun, E. 2007. Long memory in the Turkish stock market return and volatility, Central Bank Review [online], [cited 12 April 2017]. Available from Internet:

Kawakatsu, H.; Morey, M. R. 1999. An empirical examination of financial liberalization and the efficiency of emerging market stock prices, Journal of Financial Research 22(4): 385–411.

Kilic, R. 2004. On the long memory properties of emerging capital markets: evidence from Istanbul stock exchange, Applied Financial Economics 14(13): 915–922.

Korkmaz, T.; Cevik, E. I.; Ozatac, N. 2009. Testing for long memory in ISE using ARFIMA-FIGARCH model and structural break test, MPRA Paper No. 71302 [online], [cited 12 April 2017]. Available from Internet:

Koulakiotis, A.; Papapanagos, H.; Papasyriopoulos, N. 2016. Political elections, abnormal returns and stock price volatility: the case of Greece, Investment Management and Financial Innovations 13[1(1)]: 161–169.

Kundu, S.; Sarkar, N. 2016. Return and volatility interdependences in up and down markets across developed and emerging countries, Research in International Business and Finance 36: 297–311.

Li, H.; Majerowska, E. 2008. Testing stock market linkages for Poland and Hungary: a multivariate GARCH approach, Research International Business Finance 22(3): 247–266.

Li, M. C. 2016. US term structure and international stock market volatility: the role of the expectations factor and the maturity premium, Journal of International Financial Markets, Institutions and Money 41: 1–15.

Li, T.; Zhang, F.; Zhang, H.; Chen, L. 2016. Predictability of Foodstuff Stock Returns Using Financial Ratios in the UK and US Food Markets, Advance Journal of Food Science and Technology 10(5): 336–342.

MacKinnon, J. G. 1996. Numerical distribution functions for unit root and cointegration tests, Journal of Applied Econometrics 11(6): 601–618.<601::AID-JAE417>3.0.CO;2-T

Maheshchandra, J. P. 2012. Long of stock markets of India and China, International Journal of Science and Research 4(2).

McMillan, D. G.; Thupayagale P. 2008. Efficiency of the South African equity market, Applied Financial Economics Letters 4(5): 327–330.

Michael, S.; Köke, J. 2002. The Prospects of Capital Markets in Central and Eastern Europe, ZEW Discussion Paper no. 02-57: 5.

Mirza, N.; Rahat, B.; Reddy, K. 2016. Financial leverage and stock returns: evidence from an emerging economy, Economic Research (Ekonomska Istraživanja) 29(1): 85–100.

Mobarek, A.; Mollah, S. 2016. Determinants of market co-movement in developed and emerging markets, Chapter published in Global Stock Market Integration, 99–113.

Mosquera, S.; del Valle, U.; Restrepo, N.; Uribe, J. 2016. Effects of stock indices of developed and emerging markets on economic activity in Colombia: a FAVAR Approach, Lecturas de Economía 85.

Mukherjee, K. N.; Mishra, R. K. 2010. Stock market integration and volatility spillover: India and its major Asian counterparts, Research in International Business and Finance 24(2): 235–251.

Mullineux, A.; Murinde, V. 2000. Financial sector convergence in Europe, Working Paper 03. Birmingham Business School, University of Birmingham.

Naghavi, N.; Lau, W-Y. 2016. Financial liberalization and stock market efficiency: causality analysis of emerging markets, Global Economic Review 45(4): 359–379.

Neaime, S. 2016. Financial crises and contagion vulnerability of MENA stock markets, Emerging Markets Review 27: 14–35.

Ng, A. 2000. Volatility spillover effects from Japan and the US to the Pacific–Basin, Journal of international money and finance 19(2): 207–233.

Okičić, J. 2015. An empirical analysis of stock returns and volatility: the case of stock markets from Central and Eastern Europe, South East European Journal of Economics and Business 9(1): 7–15.

Rafaqet, A.; Afzal, M. 2012. Impact of global financial crisis on stock markets: evidence from Pakistan and India, Journal of Business Management and Economics 3(7): 275–282 [online], [cited 12 April 2017]. Available from Internet:

Richards, A. J. 1996. Volatility and predictability in national stock markets: how do emerging and mature markets differ?, Staff Papers, International Monetary Fund 43(3): 461–501.

Rousan, R.; Al-Khouri, R. 2005. Modelling market volatility in emerging markets in the case of daily data in Amman stock exchange 1992–2004, International Journal of Applied Econometrics and Quantitative Studies 2(4): 99–118 [online], [cited 12 April 2017]. Available from Internet:

Sakthivel, P.; Bodkhe, N.; Kamaiah, B. 2012. Correlation and volatility transmission across international stock markets: a bivariate GARCH analysis, International Journal of Economics and Finance 4(3).

Salomons, R.; Grootveld, H. 2003. The equity risk premium: emerging vs. developed markets, Emerging Markets Review 4(2): 121–144.

Sarwar, G.; Khan, W. 2016. The effect of US stock market uncertainty on emerging market returns, Emerging Markets Finance and Trade 53(8).

Savva, C. S.; Aslanidis, N. 2009. Stock market integration between new EU member states and the Eurozone, Empirical Economics 39(2): 337–351.

Savva, C. S.; Osborn, D. R.; Gill, L. 2009. Spillovers and correlations between US and major European stock markets: the role of the euro, Applied Financial Economics 19(19): 1595–1604.

Scheicher, M. 2001. The co-movements of stock markets in Hungary, Poland and the Czech Republic, International Journal of Finance and Economics 6(1): 27–39.

Sehgal, S.; Garg, V. 2016. Cross-sectional volatility and stock returns: evidence for emerging markets, Vikalpa 41(3): 234–246.

Serwa, D.; Bohl, M. T. 2005. Financial contagion vulnerability and resistance: a comparison of European stock markets, Economic Systems 29(3): 344–362.

Shephard, N. 1996. Statistical Aspect of ARCH and Stochastic volatility, Chapter published in Time Series Models: 1–67.

Singh, S.; Jain, P. K.; Yadav, S. S. 2016. Volatility in stock returns, Chapter published in India Studies in Business and Economics: 145–160.

Syriopoulos, T. 2007. Dynamic linkages between emerging European and developed stock markets: has the EMU any impact?, International Review of Financial Analysis 16(1): 41–60.

Vogelsang, T. J. 1993. Essays on testing for non-stationarities and structural change in time series models: Unpublished PhD Dissertation. Princeton University, Princeton, NJ.

Voronkova, S. 2004. Equity market integration in Central European emerging markets: a cointegration analysis with shifting regimes, International Review of Financial Analysis 13(5): 633–647.

Vveinhardt, J.; Streimikiene, D.; Ahmed, R. R.; Ahmad, N.; Rehman, A. 2016. Mean reversion: an investigation from Karachi stock exchange sectors, Technological and economic development of economy 22(4): 493–511.

Wagner, N.; Szimayer, A. 2004. Local and spillover shocks in implied market volatility: evidence for the US and Germany, Research international Business Finance 18(3): 237–251.

Wang, Y.; Gunasekarage, A.; Power, D. M. 2005. Return and volatility spillovers from developed to emerging capital markets: the case of South Asia, Contemporary Studies in Economics and Financial Analysis 86: 139–166.

Worthington, A.; Higgs, H. 2004. Transmission of equity returns and volatility in Asian developed and emerging markets: a multivariate GARCH analysis, International Journal Finance & Economics 9(1): 71–80.

Xiao, L.; Dhesi, G. 2010. Volatility spillover and time varying conditional correlation between the European and US stock markets, Global Economics and Finance Journal 3(2): 148–164.

Yang, G.; Liu, H. 2016. Financial development, interest rate liberalization, and macroeconomic volatility, Emerging Markets Finance and Trade 52(4): 991–1001.

Yarovaya, L.; Brzeszczyński, J.; Lau, C. K. M. 2016. Intra- and inter-regional return and volatility spillovers across emerging and developed markets: evidence from stock indices and stock index futures, International Review of Financial Analysis 43: 96–114.

Yavas, B. F.; Rezayat, F. 2016. Country ETF returns and volatility spillovers in emerging stock markets, Europe and USA, International Journal of Emerging Markets 11(3): 419–437.