Economic Factors Contributing to Time-Varying Conditional Correlations in Stock Returns

Nagayasu, Jun (2010): Economic Factors Contributing to Time-Varying Conditional Correlations in Stock Returns.

Abstract

This paper attempts to find economic and financial factors contributing to the changing correlations of stock returns. Time-varying correlations were documented in previous studies, but a few attempts have been made to investigate their evolution. Using daily data from the Asia-Pacific region, this paper provides evidence that return correlations are negatively correlated with the distance between the markets. Furthermore, correlations tend to be higher in advanced countries and increase at times of the active trading (e.g., around the Lehman shock). Instead, the level of correlations declines among pairs of countries with less financial integration.

• Item Type: MPRA Paper
• Language: English
• Keywords: Conditional correlations, DCC
• Subjects: G - Financial Economics > G1 - General Financial Markets > G15 - International Financial Markets; F - International Economics > F3 - International Finance > F36 - Financial Aspects of Economic Integration

References

Baker, D., Loughran, T., 2007. The geography of S&P500 stock returns. Journal of Behavioral Finance 8(4), 177-190.

Calvo, S., Reinhart, C. M., 1996. Capital flows to Latin America: Is there evidence of contagion effects? In Calvo, G. A., Goldstein, M., Hochreiter, E. (Eds.) Private Capital Flows to Emerging Markets After the Mexican Crisis. Washington DC: Institute for International Economics.

Chen, N-F, Zhang, F. 1997. Correlations, trades, and stock returns of the Pacific-Basin markets, Pacific-Basin Finance Journal 5, 559-577.

Bayoumi, T., Fazio, G., Kumar, M., MacDonald, R., 2007. Fatal attraction: using distance to measure contagion in goods times as well as bad. Review of Financial Economics 16, 259-273.

Engle, R., 2002. Dynamic conditional correlation: a simple class of multivariate generalized autoregressive conditional heteroskedasticity models. Journal of Business and Economic Statistics 20(3), 339-350.

Flavin, T. J., Hurley, M. J., Rousseau, F., 2002. Explaining stock market correlation: A gravity model approach. Manchester School, 87-106.

Forbes, K. J. and Rigobon, R., 2002. No contagion, only interdependence: measuring stock market comovements. Journal of Finance LVII(5), 2223-2261.

Frankel, J. A., 1992. Measuring international capital mobility: A review 82(2), 197-202.

Goldstein, M., 1998. The Asian Financial Crisis: Causes, Cures and Systematic Implications. Washington DC: Institute of International Economics.

Hamao, Y., Masulis, R. W., Ng, V., 1990. Correlations in price changes and volatility across international stock markets. Review of Financial Studies 3(2), 281-307.

King, M. A., Wadhwani, S., 1990. Transmission of volatility between stock markets. Review of Financial Studies 3(1), 5-33.

Kuper, G., Lestano, 2007. Dynamic conditional correlation analysis of financial market interdependence: An application to Thailand and Indonesia. Journal of Asian Economics 18, 670-684.

Levy, H., Sarnat, M., 1970. International diversification of investment portfolio. American Economic Review 60(4), 668-675.

Lin, W-L., Engle, R. F., Ito, T., 1994. Do bulls and bears move across borders? International transmission of stock returns and volatility. Review of Financial Studies 7(3), 507-38.

Liu, Y. A., Pan, M-S., Shieh, J. C. P., 1998. International transmission of stock price movements: Evidence from the US and five Asian-Pacific markets. Journal of Economics and Finance 22(1), 59-69.

Longin, F., Solnik, B., 1995. Is the correlation in international equity returns constant: 1960-1990. Journal of International Money and Finance 14(1), 3-26.

Masih, A. M. M., Masih, R., 1997. Dynamic linkages and the propagation mechanism driving major international stock markets: An analysis of the pre- and post-Crash eras. Quarterly Review of Economics and Finance 37(4), 859-885.

Makridakis, S. G., Wheelwright, S. C., 1974. An analysis of the interrelationships among the major world stock exchanges. Journal of Business, Finance and Accounting 1(2), 195-215.

Pretorius, E., 2002. Economic determinants of emerging stock market interdependence. Emerging Markets Review 3, 84-105.

Roll, R., 1992. Industrial structure and the comparative behavior of international stock market indices. Journal of Finance 47(1), 3-41.

Yang, S-Y., 2005. A DCC analysis of international stock market correlations: the role of Japan on the Asian Four Tigers. Applied Financial Economics Letters 1(2), 89-93.

Yu, I-W., Fung, K-P., Tam, C-S., 2010. Assessing financial market integration in Asia—equity markets. Journal of Banking and Finance 34, 2874-2885.