Commonality In Volatility: Does It Exist In Amman Stock Exchange?

Abstract

Sharma et al. (2014) uncovered significant evidence of co-movement between individual stock volatility and market volatility in NYSE. Their study provides the first evidence of commonality in volatility in the developed markets. Commonality seems to be more vital in emerging markets, which are characterized by higher average sample returns and higher levels of stock price volatility. This study investigates whether individual stock volatility co-moves with the overall market volatility in emerging markets. Our data set consisted of the daily observations of 105 companies listed in Amman Stock Exchange (ASE) over the period 2006-2015. Time series GARCH (1, 1) regressions were estimated for each stock individually. The results indicated a strong evidence of commonality in volatility in ASE. Thus, 76%- 89% of the firms investigated showed a statistically significant positive co-movement of their volatilities with the overall market volatility. However, when sectoral volatility was added to the models, the evidence of co-movement with market volatility became less important in the financial and industrial sectors. The firms in these two sectors showed a stronger co-movement of their volatilities with sectoral volatility if compared to their co-movement with market volatility. Moreover, our results exhibited no size effect in the commonality in volatility. No significant differences were found between the portfolios of different sized stocks. Our findings are vital to investors, portfolio managers, researchers and all parties who are interested in stock exchanges. To the best of authors’ knowledge, this study is the first in Jordan that tackles commonality in volatility.