1 A multivariate GARCH analysis of equity returns and volatility in Asian equity markets Andrew Worthington ∗ , Helen Higgs School of Economics and Finance, Queensland University of Technology Abstract This paper examines the transmission of equity returns and volatility among Asian equity markets and investigates the differences that exist in this regard between the developed and emerging markets. Three developed markets (Hong Kong, Japan and Singapore) and six emerging markets (Indonesia, Korea, Malaysia, the Philippines, Taiwan and Thailand) are included in the analysis. A multivariate generalised autoregressive conditional heteroskedasticity (MGARCH) model is used to identify the source and magnitude of spillovers. The results generally indicate the presence of large and predominantly positive mean and volatility spillovers. Nevertheless, mean spillovers from the developed to the emerging markets are not homogenous across the emerging markets, and own-volatility spillovers are generally higher than cross-volatility spillovers for all markets, but especially for the emerging markets. JEL classification: C51, G15 Keywords: Emerging equity markets; mean and volatility spillovers; multivariate GARCH 1. Introduction Following the massive devaluation of the Thai baht in July 1997, most East Asian and South- East Asian financial markets, particularly in Korea, Malaysia, Indonesia and the Philippines, experienced similarly dramatic devaluations in exchange rates. In these markets managed currencies were allowed to move in a wider band or abandoned altogether, capital control measures were introduced, bank and sovereign ratings were downgraded, and inflationary expectations revised upward along with unemployment. As the crises intensified, foreign exchange and stock market turmoil spread across Asia. News of economic and political distress, particularly bank and corporate fragility, became commonplace, and modest recoveries in some markets were repeatedly assailed by deteriorating conditions in others. Only by mid 1999 was Asian recovery becoming a reality, and only after extensive microeconomic reform, fiscal contraction and international financial assistance. Nevertheless, the pace of Asian recovery is exceedingly slow and uneven. While some economies, such as Korea, have made moderate gains in 2000, they are followed at a distance by many, including Thailand, the Philippines, Hong Kong and Singapore, and yet further behind by several of the markets most distressed by the regional collapse, especially Malaysia and Indonesia. Quite apart from the posited macroeconomic, structural and policy origins of the Asian economic, currency and financial crises, the manner in which these crises reverberated across national stock markets has created considerable interest in the study of the transmission of returns and volatility among emerging capital markets (Bekaert and Harvey 1997; Bekaert and Harvey 2000). This is especially noteworthy since Asian capital markets have been traditionally viewed as being relatively isolated from each other. However, with the Asian ∗ Corresponding author: School of Economics and Finance, Queensland University of Technology, GPO Box 2434, Brisbane, QLD 4001, Australia. Tel. 61 (0)7 3864 2658, Fax. 61 (0)7 3864 1500, email. a.worthington@qut.edu.au