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Market risks that change US-European equity correlations

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  • Sarwar, Ghulam

Abstract

We study the options-implied market risks that affect US-European stock-return correlations during 2007–2021. We discover that U.S. stock- and bond-market uncertainty, stock-market tail risk, European equity-market risk, and global credit risk are dominant contributors to changing US-European stock correlations during the GFC period. However, these market risks collectively contribute less to correlations in the post-GFC period. Further, correlations rise in times of rising U.S. stock and bond market risks. Rising equity tail risk and global credit risk raise correlations in the GFC period but lower them in the post-GFC period. Also, European stock-market uncertainty exerts a negative influence on stock correlations. Our results disentangle the risks of U.S. and European stock and bond markets that change the cross-market diversification benefits.

Suggested Citation

  • Sarwar, Ghulam, 2023. "Market risks that change US-European equity correlations," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 83(C).
    • Handle: RePEc:eee:intfin:v:83:y:2023:i:c:s1042443122002037
    DOI: 10.1016/j.intfin.2022.101731
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    More about this item

    Keywords

    Diversification; Asset correlations; VIX; Bond risk; Market risks;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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