Paper
Journal of Derivatives & Hedge Funds (2008) 14, 2–8. doi:10.1057/jdhf.2008.2
A study of the effects of corruption on variance of realised returns
Practical applications This paper uses corruption to explain the varying levels of volatility in global financial markets. Corruption is found to be significantly correlated with volatility. This finding has many implications for businesses, financial institutions, and investors who venture into global markets as this gives analysts another tool to gauge volatility in countries and assess risk for pricing securities. In analysis of newly formed financial markets and markets without reliable information, this tool can help assess market volatility. In turn, this will help predict a beta to properly gauge the appropriate returns for the systematic risk inherent in the financial market. This will determine if any security is overpriced or undervalued.
1Liautaud Graduate School of Business, University of Illinois at Chicago, Chicago, IL, USA.
Correspondence: Nigel Yin, E-mail: nyin@uic.edu
2Nigel Yin graduated Summa Cum Laude from Southern Illinois University in Carbondale in 2007, specialising in financial institutions. He is currently in the MBA programme at the University of Illinois at Chicago, specialising in finance.
Received 4 March 2008; Revised 4 March 2008.
Abstract
In this study, we argue that volatility in a country's financial market depends on the country's level of corruption. We postulate that countries with higher corruption will experience a larger standard deviation of returns. We also assume that within the same time-frame those less corrupt countries will experience a lower standard deviation of returns from their financial markets. The paper presented empirical results to support our hypothesis.
Keywords:
corruption, foreign financial market, volatility, variance, investment
