FIEGARCH-M and and International Crises: A Cross-Country Analysis

We apply the fractionally integrated exponential GARCH with volatility-in-mean (FIEGARCH-M) model of Christensen, Nielsen & Zhu (2007) to estimate the risk premium after different crises occurred in major stock markets during the past two decades. The model allows keeping the long memory property in volatility and a filtered volatility-in-mean component is used as a proxy for the risk factor. The estimation results show that the 1987 stock market crash and September 11, 2001 attack have persistent effects on stock markets. A significant risk factor is found for both crises in most crisis-hit markets, and it is nonmonotic for different markets. Either volatility feedback or risk premium is a possible explanation for the risk factor. On the contrary, Asian financial crisis and other market-specific crises have no persistent impact on most markets.