Comovement of Selected International Stock Market Indices:A Continuous Wavelet Transformation and Cross Wavelet Transformation Analysis

Masih, Mansur and Majid, Hamdan Abdul (2013): Comovement of Selected International Stock Market Indices:A Continuous Wavelet Transformation and Cross Wavelet Transformation Analysis.

Abstract

This study accounts for the time-varying pattern of price shock transmission, exploring stock market co-movements using continuous wavelet coherency methodology to find the correlation analysis between stock market indices of Malaysia, Thailand (Asian), Greece (Europe) and United States, in the time-frequency domain of time-series data. We employ the Wavelet Coherence method with the consideration of the financial crisis episodes of 1997 Asian Financial Crisis, 1998 Russian Sovereign Debt Default, 9/11 Attack on World Trade Centre US, 2008 US Sub-Prime Mortgage Crisis and the recent 2010-2011 Greece Debt Crisis. Results tend to indicate that the relations among indices are strong but not homogeneous across time scales, that local phenomena are more evident than others in these markets and that there seems to be no quick transmission through markets around the world, but a significant time delay. The relations among these indices have changed and evolved through time, mostly due to the financial crises that occurred at different time periods. Results also favour the view that regionally and economically closer markets exhibit higher correlation and more short run co-movements among them. The high correlation between the two regional indices of Malaysia and Thailand, indicates that for the international investors, it is little gain to include both in their portfolio diversification. Strong co-movement is mostly confined to long-run fluctuations favouring contagion analysis. This indicates that shocks in the high frequency but low period are short term but shocks in the low frequency but high period are long term with the trend elements affecting the co-movements of the indices. The study of market correlations on the frequency-time scale domain using continuous wavelet coherency is appealing and can be an important tool in decision making for different types of investors.

• Item Type: MPRA Paper
• Language: English
• Keywords: stock market comovement; continuous wavelet transform; cross-wavelet; wavelet coherency; frequency-time scale domain
• Subjects: C - Mathematical and Quantitative Methods > C2 - Single Equation Models ; Single Variables > C22 - Time-Series Models ; Dynamic Quantile Regressions ; Dynamic Treatment Effect Models ; Diffusion Processes; C - Mathematical and Quantitative Methods > C5 - Econometric Modeling > C58 - Financial Econometrics; E - Macroeconomics and Monetary Economics > E4 - Money and Interest Rates > E44 - Financial Markets and the Macroeconomy; G - Financial Economics > G1 - General Financial Markets > G15 - International Financial Markets

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