In the age of globalization, it has become very important to find out the economic and non-variables which are significantly responsible for volatility in stock markets. Investors have become largely sensitive to these factors which results in change their investment strategy at the time of emergence on national and international level. The present study is an attempt to measure how equity markets of developed and developing countries respond to volatility in international crude oil price. To investigate the problem, the study uses a set of ten stock markets from developed countries and seven stock markets from developing countries. To analysis how investors react to crude oil price volatility which results in volatility in stock market, two stages GARCH (1,1) model is used. In the first stage, GARCH (1,1) is used to estimate the conditional volatility of crude oil price expressed in dollar, thereafter in the second stage, the estimated conditional volatility of crude oil price is used as independent regressor to estimate the conditional volatility of world equity markets in question by running GARCH (1,1) model. The data set used in the study involves the monthly prices of stock exchange listed indices for the period ranging from January 1995 through December 2007. In brief, the research methodology applied in the study includes application of Jarque-Bera test to determine the normality of data, Ljung-Box to examine the cross correlation in stock returns, GARCH (1,1) estimation of asymmetric volatility, and finally correlation to examine the volatility integration between world equity markets returns and crude oil price in the international market. The results reveal the following ? Oil prices are normally distributed during the study time period, ? The significance of Jarque Bera statistics indicates that out of developed countries, Japan stock market and out of developing countries, India and China stock markets returns are normally distributed, ? On an average, stock markets of developing countries have offered higher average return to the investors, ? The first stage GARCH (1,1) results of oil price exhibit that oil price volatility is significantly influenced by unexpected events in international markets and volatility in preceding time periods, ? The second stage GARCH (1,1) results exhibits that crude oil price volatility significantly determines the stocks markets return volatility of both developed and developing countries. The direct observations can be made here that investors are largely sensitive to fluctuations in crude oil prices in the international market, ? Correlation matrix of stock markets return volatility and crude oil price volatility in case of both developed and developing countries exhibit a higher degree of correlation. These results bring out the corresponding relation between crude oil price volatility and stock markets return volatility.
