Real-world equity calibration Unconditional equity volatility in emerging and developed economies
Document ID: 2010-1771
Published on: 8th April 2010
Author: Frederic El Cherif
In our ESG models we model a large number of emerging and developed economies. Setting a target for unconditional equity volatility in emerging markets is challenging as data coverage is limited (by contrast to more developed markets). The limited availability of data makes it difficult to provide a robust assessment of unconditional volatility. Our approach to date has been to initialise volatility of equity excess returns in emerging economies by multiplying the average unconditional volatility of equity excess returns in developed economies by 1.50. We would then use the exponentially weighted moving average estimator from the point of initialisation of emerging market equity volatility updated with new observations of equity returns in the emerging economy. This note updates our analysis on the appropriateness of scaling volatility in developed economies by 1.50.
