Switching Volatility in Emerging Stock Markets : Evidence from the New EU Member Countries

In this paper, we use weekly stock market data to examine whether the volatility of stock returns of ten emerging capital markets of the new EU member countries has changed as a result of their accession in the EU. In particular we are interested in understanding whether there are high and low periods of stock returns volatility and the degree of correlation across these markets. We estimate a Markov-Switching ARCH (SWARCH) model proposed by Hamilton and Susmel (1994) and we allow for the possibility that three volatility regimes may exist for stock returns volatility. The main finding of the present study is that the high volatility of stock returns of all new EU emerging stock markets is associated mainly with the 1997-1998 Asian and Russian financial crisis while there is a transition to the low volatility regime as they approach the accession to EU in 2004