Business Cycles, Financial Crises, and Stock Volatility in Jordan Stock Exchange

Abstract

We estimate GARCH-M model to measure the impact of the financial crisis on stock market returns and volatility by introducing dummy variables in the mean and variance equations to measure the behavior of stock return and volatility during the crises. We examine the impact of these crises, namely, the Mexico's Tequila crises of 1994, the Asian /Russian crises in 1997-1998, September eleventh attack in the United States in 2001, Iraq war in 2004, financial crisis in November 2005 and the global financial crisis of 2008-2009, on the behavior of stock returns during these crises. Not surprisingly stock returns are reliably negative during financial crisis. The dummy variable is negative when we account for the local stock market crash during 2005 and the global financial crises of 2008. It's surprisingly that stock returns are reliably positive during the Iraq war in 2004. As a result, the drastic changes in volatility may initiate the negative and positive shifts based on the impact of news on the Jordanian Market Other crisis shows no impact on Amman stock exchange returns. Volatility behavior during crises behaves in different manners. Imported Crises cause volatility to decrease or increase based on the general public expectations. If expectations are pessimistic, the effect will be resembled by dampen demand for investment causing volatility to decrease and the size trading to decrease. If expectations are optimistic volatility will increase derived by the increased size of investment. The local stock market crash during 2005 and the global financial crises of 2008 show no impact on volatility with insignificant coefficients. Finally, the positive relationship between risk and return is preserved.