Hyde, Stuart J and Bredin, Don P and Nguyen, Nghia (2007): Correlation dynamics between Asia-Pacific, EU and US stock returns.
Download (2MB) | Preview
This paper investigates the correlation dynamics in the equity markets of 13 Asia-Pacific countries, Europe and the US using the asymmetric dynamic conditional correlation GARCH model (AG-DCC-GARCH) introduced by Cappiello, Engle and Sheppard (2006). We find significant variation in correlation between markets through time. Stocks exhibit asymmetries in conditional correlations in addition to conditional volatility. Yet asymmetry is less apparent in less integrated markets. The Asian crisis acts as a structural break, with correlations increasing markedly between crisis countries during this period though the bear market in the early 2000s is a more significant event for correlations with developed markets. Our findings also provide further evidence consistent with increasing global market integration. The documented asymmetries and correlation dynamics have important implications for international portfolio diversification and asset allocation.
|Item Type:||MPRA Paper|
|Original Title:||Correlation dynamics between Asia-Pacific, EU and US stock returns|
|Keywords:||dynamic conditional correlation; asymmetry; international portfolio diversification|
|Subjects:||C - Mathematical and Quantitative Methods > C3 - Multiple or Simultaneous Equation Models ; Multiple Variables > C32 - Time-Series Models ; Dynamic Quantile Regressions ; Dynamic Treatment Effect Models ; Diffusion Processes ; State Space Models
F - International Economics > F3 - International Finance
G - Financial Economics > G1 - General Financial Markets > G15 - International Financial Markets
|Depositing User:||Stuart Hyde|
|Date Deposited:||24. Jul 2008 10:39|
|Last Modified:||11. Feb 2013 23:08|
Ang, A. and G. Bekaert 2002, International asset allocation with regime shifts, Review of Financial Studies, 15, 1137-1187.
Bae, K.-H., G.A. Karolyi and R.M. Stulz 2003, A new approach to measuring financial contagion, Review of Financial Studies, 16, 717-763.
Baele, L. 2005, Volatility Spillover Effects in European Equity Markets, Journal of Financial and Quantitative Analysis, 40, 373-401.
Bekaert, G. and C.R. Harvey 1995, Time-varying world market integration, Journal of Finance, 50, 403-444.
Bekaert, G. and C.R. Harvey 1997, Emerging equity market volatility, Journal of Financial Economics, 43, 29-77.
Cappiello, L., R.F. Engle and K. Sheppard 2006, Asymmetric dynamics in the correlations of global equity and bond returns, Journal of Financial Econometrics, 4, 537-572.
Cha, B. and Y.-L. Cheung 1998, The impact of the US and the Japanese equity markets on the emerging Asia-Pacific equity markets, Asia-Pacific Financial Markets, 5, 191-209.
Chan, K.C., B.E. Gup and M. Pan 1992, An empirical analysis of stock prices in major Asian markets and the United States, Financial Review, 27, 289-307.
Darrat, A.F. and M. Zhong 2002, Permanent and transitory driving forces in Asian-Pacific stock markets, Financial Review, 31, 343-363.
Edwards, S. and R. Susmel 2001, Volatility dependence and contagion in emerging equity markets, Journal of Development Economics, 66, 505-532.
Engle, R.F. 2002, Dynamic conditional correlation: A simple class of multivariate generalized autoregressive-conditional heteroskedasticity models, Journal of Business and Economic Statistics, 20, 339-350.
Engle, R.F., T. Ito and W.-L. Lin 1990, Meteor showers or heat waves? Heteroskedastic intra-daily volatility in the foreign exchange market, Econometrica, 58, 525-542.
Engle, R.F. and K. Sheppard 2001, Theoretical and empirical properties of Dynamic Conditional Correlation MVGARCH, Working paper No. 2001-15, University of California, San Diego.
Erb, C.B., C.R. Harvey and T.E. Viskanta 1994, Forecasting international equity correlations, Financial Analysts Journal, 50, 32-45.
Garrett, I. and S. Spyrou 1999, Common stochastic trends in emerging equity markets, The Manchester School, 67, 649-660.
Ghosh, A., R. Saidi and K.H. Johnson 1999, Who moves the Asia-Pacific stock markets - US or Japan?", Financial Review, 34, 159-169.
Goetzmann, W.N., L. Li and K.G. Rouwenhorst 2005, Long-term global market correlations, Journal of Business, 78, 1-38.
Hamao, Y., R. Masulis and V. Ng 1990, Correlation in price changes and volatility across international stock markets, Review of Financial Studies, 3, 281-307.
Janakiramanan, S. and A. Lamba 1998, An empirical investigation of linkages between Pacific-Basin stock markets, Journal of International Financial Markets, Institutions and Money, 8, 155-173.
Kasa, K. 1992, Common stochastic trends in international stock markets, Journal of Monetary Economics, 29, 95-124.
Kaminsky, G.L. and C.M. Reinhart 1998, Financial crises in Asia and Latin America, American Economic Review, 88, 444-448.
Kim, S. 2005, Informational leadership in the advancd Asia-Pacific stock markets: Return, volatility and volume information spillovers from the US and Japan, Journal of Japanese and International Economics, 19, 338-365.
Kroner, K.F. and V.K. Ng 1998, Modelling asymmetric comovements of asset returns, Review of Financial Studies, 11, 817-844.
Longin, F. and B. Solnik, 1995, Is the Correlation in International Equity Returns Constant, Journal of International Money and Finance, 14, 3-26.
Longin, F. and B. Solnik 2001, Extreme correlation and international equity markets, Journal of Finance, 56, 649-676.
Maish, A.M.M. and R. Maish 1999, Are Asian stock market fluctuations due mainly to intra-regional contagion effects? Evidence based on Asian emerging markets", Pacific-Basin Finance Journal, 7, 251-282.
Manning, N. 2002, Common trends and convergence? South East Asian equity markets 1988-1999, Journal of International Money and Finance, 21, 183-202.
Ng., A. 2000, Volatility spillover effects from Japan and the US to the Pacific-Basin, Journal of International Money and Finance, 19, 207-233.
Phylaktis, K. 1999, Capital market integration in the Pacific Basin region: an impulse response analysis, Journal of International Money and Finance, 18, 267-287.
Phylaktis K. and F. Ravazzolo 2002, Measuring financial and economic integration with equity prices in emerging markets, Journal of International Money and Finance, 21, 879-903.
Worthington, A. and H. Higgs 1004, Transmission of equity returns and volatility in Asian developed and emerging markets: A Multivariate GARCH analysis, International Journal of Finance and Economics, 9, 71-80.
Yang, J., J.W. Kolari and I. Min 2003, Stock market integration and financial crises: the case of Asia, Applied Financial Economics, 13, 477-486.
Yang, J., J.W. Kolari and P.W. Sutanto 2004, On the stability of long-run relationships between emerging and US stock markets, Journal of Multinational Financial Management, 14, 233-248.