Comparison between response dynamics in transition economies and developed economies

In developed economies, the sign of the price increment influences the volatility in an asymmetric fashion—negative increments tend to result in larger volatility (increments with larger magnitudes), while positive increments result in smaller volatility. We explore whether this asymmetry extends from developed economies to European transition economies and, if so, how such asymmetry changes over time as these transition economies develop and mature. We analyze eleven European transition economies and compare the results with those obtained by analyzing U.S. market indices. Specifically, we calculate parameters that quantify both the volatility asymmetry and the strength of its dependence on prior increments. We find that, like their developed economy counterparts, almost all transition economy indices exhibit a significant volatility asymmetry, and the parameter $\gamma$ characterizing asymmetry fluctuates more over time for transition economies. We also investigate how the association between volatility and volatility asymmetry varies by type of market. We test the hypothesis of a negative correlation between volatility and volatility asymmetry. We find that, for developed economies, $\gamma$ experiences local minima during (i) “Black Monday” on October 19, 1987, (ii) the dot-com bubble crash in 2002, and (iii) the 2007–2009 global crisis while for transition economies, $\gamma$ experiences local maxima during times of economic crisis.

Figure 1

(Color online) Changes of the volatility asymmetry parameter $\gamma$ each year over the 20-year period 1989–2009. (a) For transition economies $\gamma$ for both subperiods (crisis and control) changes over time. (b) The same, but for countries with statistically significant $\gamma$ only for the crisis subperiod. The parameter $\gamma$ substantially changes from positive to negative values. (c) As a representative for developed markets, we use the S&P 500 index. Over the last 20 years, $\gamma$ values vary over time, but $\gamma$ is always positive. The local minima for $\gamma$ values we obtain during dot-com bubble crash and during the 2007–2009 global crisis.

Figure 2

Changes of the volatility asymmetry parameter $\gamma$, calculated every two years over the 27-year period 1980–2008 for three developed markets: (a) NASDAQ, (b) NYSE, and (c) S&P500. Note the local minima for $\gamma$ values during Black Monday, the dot-com bubble crash, and during the 2007–2009 global crisis. The late-2000s recession began in the United States in December 2007.