The impact of subprime mortgage crisis on the short-run and long-run volatility components of the Malaysian stock market

Abstract

This study investigates the long-run and short-run movements of two emerging stock market volatilities using a volatility decomposition methodology. We studied the impact of 2007–2008 subprime mortgage crisis on the transitory and permanent volatility components in terms of two empirical stylized facts, the leverage effect and volatility persistence. In order to do so, the long spanning data are separated into three different periods. For the former stylized fact, the crisis impact on the leverage effect is mainly temporary with no long-run effect to the stock markets. This finding explains that the leverage effect is mostly difficult to adjust in the short-run transitory volatility during the crisis periods. However with proper risk management and long term strategies, most of the market participants are able to anticipate and handle this news impact in the long-run. For the latter stylized fact, the crisis has slightly increased the volatility persistence in all the markets. From the viewpoint of heterogeneous market hypothesis, the higher intensity of volatility persistence implies the stock markets are less informational efficient.