Market Volatility and Regulatory Governance in Emerging Markets

Abstract

We study the relationship of stock return volatility in 32 emerging countries to the governance environment in each country. Our results indicate that the effectiveness of public regulatory processes in different countries explains the differences in the observed market volatility. Aspect of governance relating to the political system does not appear to significantly influence the stock market volatility across countries. On the other hand, the governance aspect relating to market regulation and its effectiveness appears to be negatively associated with market volatility. It indicates that better governance, effective capital markets regulations and efficient conflict resolution mechanisms are likely to lead to a smoother process of regulatory adjustment and to lower market volatility.