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Correlation dynamics between Asia-Pacific, EU and US stock returns

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Author Info
Hyde, Stuart J
Bredin, Don P
Nguyen, Nghia

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Abstract

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.

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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 9681.

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Date of creation: May 2007
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Handle: RePEc:pra:mprapa:9681

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Related research
Keywords: dynamic conditional correlation; asymmetry; international portfolio diversification;

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Find related papers by JEL classification:
C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions
F3 - International Economics - - International Finance
G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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  7. L. Baele, 2003. "Volatility Spillover Effects in European Equity Markets," Working Papers of Faculty of Economics and Business Administration, Ghent University, Belgium 03/189, Ghent University, Faculty of Economics and Business Administration. [Downloadable!]
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  8. Kaminsky, Graciela L & Reinhart, Carmen M, 1998. "Financial Crises in Asia and Latin America: Then and Now," American Economic Review, American Economic Association, vol. 88(2), pages 444-48, May. [Downloadable!] (restricted)
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  9. Robert F. Engle & Kevin Sheppard, 2001. "Theoretical and Empirical properties of Dynamic Conditional Correlation Multivariate GARCH," NBER Working Papers 8554, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  15. Lorenzo Cappiello & Robert F. Engle & Kevin Sheppard, 2006. "Asymmetric Dynamics in the Correlations of Global Equity and Bond Returns," Journal of Financial Econometrics, Oxford University Press, vol. 4(4), pages 537-572. [Downloadable!] (restricted)
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  16. Geert Bekaert & Campbell R. Harvey, 1994. "Time-Varying World Market Integration," NBER Working Papers 4843, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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