Is the global leadership of the US financial market over other financial markets shaken by 2007-2009 financial crisis? Evidence from Wavelet Analysis

Saiti, Buerhan and Bacha, Obiyathulla and Masih, Mansur (2014): Is the global leadership of the US financial market over other financial markets shaken by 2007-2009 financial crisis? Evidence from Wavelet Analysis.

Abstract

The issue of market linkages (and price discovery) between stock indices and the lead-lag relationship are topics of interest to financial economists, financial managers and analysts. The lead-lag relationship analysis should take into account both the short and long-run investor. From a portfolio diversification perspective, the first type of investor is generally more interested in knowing the comovement of stock returns at higher frequencies, that is, short-run fluctuations, while the latter concentrates on the relationship at lower frequencies, that is, long-run fluctuations. The study uses a technique known as the ‘wavelet approach’ which has been very recently imported to finance from engineering sciences. Daily return data covering the period from June 2005 to December 2011 for MSCI stock indices of East Asian countries (Japan, China, Korea, Taiwan and Hong Kong) are analyzed. We examine the following empirical question: Is the global leadership of the US financial market shaken by the 2007-2009 financial crisis in the short- and long run? Our findings tend to, more or less, broadly suggest that regardless of the period considered, the US market is still the global leader in the exact time intervals. This is evidenced in the asymmetry of cross-correlation function of MSCI stock indices with the MSCI index of the US becoming more pronounced as the timescale increases. The evidence hitherto unexplored produced by the application of wavelet cross-correlation amongst the selected stock indices provides robust and very useful information to international financial analysts and short-term investors.

• Item Type: MPRA Paper
• Language: English
• Keywords: Lead-lag, Causality, Wavelet, Stock index, Financial crisis
• 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; G - Financial Economics > G1 - General Financial Markets > G15 - International Financial Markets

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