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Contagion as a Domino Effect in Global Stock Markets
Abstract
This paper shows that stock market contagion occurs as a domino effect, where confined local crashes evolve into more widespread crashes. Using a novel framework based on ordered logit regressions we model the occurrence of local, regional and global crashes as a function of their past occurrences and financial variables. We find significant evidence that global crashes do not occur abruptly but are preceded by local and regional crashes. Besides this form of contagion, interdependence shows up by the effect of interest rates, bond returns and stock market volatility on crash probabilities. When it comes to forecasting global crashes, our model outperforms a binomial model for global crashes only.
... Oil prices prove to be a driving force in the process. 23 The study of Charlot et al. confirmed the detrimental effect of 2008 financial crisis on diversification potential of commodity futures, but authors point out that the nature of the financial crisis effect is temporary. 24 Authors performed a vast analysis that included daily data for the four major commodity indices and 32 individual commodity futures returns, along with stock and bond returns, spanning a period from 2000 to 2014. ...
... Tarchella and Dhaoui conducted the analysis of Chinese stock market, since China is considered the origin of pandemic, and found that commodities 23 Lombardi, M. J., Ravazzolo, F.: On the correlation between commodity and equity returns: Implications for portfolio allocation, Journal of Commodity Markets, 2(1) 2016, pp. 45-57. ...
... For example, according to the market intelligence report by S&P Global, 2 the total amount of inward FDI climbed from around $120000 million per year in the preceding ten years to $174000 million between 2019 and 2021. According to Markwat et al. (2009), the recessionary era exacerbates correlational features of global stock returns due to error variance propagation. Moreover, Kang et al. (2019) debated that there is an increase in return connectedness amongst global FM, indicating the strength of information transmission during a crisis regime. ...
... Local FMs' connection to the global financial system renders them susceptible to risk transmission shocks from the US (see Markwat et al., 2009;Kang et al., 2019;Vo & Tran, 2020). Furthermore, macroeconomic determinants of ASEAN-5 nations' exposure to US FM improved the shock reception capacity of domestic equities markets, causing currency devaluations (see Figure 1). ...
... In their study, Markwat et al. (2009) used a novel unifying framework to model the occurrence of local, regional, and global crashes relative to historical occurrences of these differing crashes and financial variables. The authors concluded that global crashes do not happen suddenly but are usually preceded by local and regional crashes. ...
... The results further found that interest rates, bond returns, and volatility affect the probabilities of crash occurrence or the types. In their follow-up study, Markwat et al. (2009) on "Contagion as a Domino Effects in Global Stock Markets, in which authors similarly employed a novel framework based on ordered logit regressions to model the occurrence of local, regional, and global crashes as a function of their historical occurrences and financial variables. The results again confirmed the earlier finding that global crashes are typically preceded by local and regional crashes. ...
This study examined the contagion and structural break between Nigerian Stock Exchange Market (NSE) and some selected stock markets, namely: Ghana, South Africa (SA), Tunisia, and the United States. Two periods were considered: the crisis period (1st May 2016 to 31st December 2017) and the calm period (1st January 2018 to 31st December 2019). Following the work of (Chan, J., Fry-McKibbin, R. & Hsiao C. (2018). A Regime switching skew-normal model of contagion. Studies in Nonlinear Dynamics and Econometrics, Volume 23, Issue 1), the study used the Regime Switching Skew-Normal (RSSN) model which is capable of measuring contagion and structural breaks between markets. Our results indicated evidence of a structural break between the crisis and calm periods, which is a prerequisite for contagion. Furthermore, the study found a moderate contagion between Nigeria and SA stock markets but an absence of contagion between Nigeria and the remaining stock markets, suggesting capital flights from Nigeria to SA for safety during the 2016 economic recession. However, we were unable to find any evidence of capital reversal to Nigeria from SA during the calm period, implying an existence of an asymmetric relationship between Nigeria and South African stock markets. The absence of contagion between Nigeria and the selected African stock markets, suggests there is no significant economic cooperation and cross-border portfolio investment flow among the countries. This development further underpins the imperativeness of the full implementation of the African Continental Free Trade Agreement (AfCFTA), which encourages economic activities and investment flow on the continent.
... This is not the case in the event of a contagion. [10] observed that contagion in global stock markets are usually triggered by local crashes leading to region crashes. [10] also noted that contagion is also affected by past occurrences of similar crashes, i.e., contagion is mathematically represented by conditional heteroscedasticity summarized in a typical volatility model. ...
... [10] observed that contagion in global stock markets are usually triggered by local crashes leading to region crashes. [10] also noted that contagion is also affected by past occurrences of similar crashes, i.e., contagion is mathematically represented by conditional heteroscedasticity summarized in a typical volatility model. ...
Contagion arising from clustering of multiple time series like those in the stock market indicators can further complicate the nature of volatility, rendering a parametric test (relying on asymptotic distribution) to suffer from issues on size and power. We propose a test on volatility based on the bootstrap method for multiple time series, intended to account for possible presence of contagion effect. While the test is fairly robust to distributional assumptions, it depends on the nature of volatility. The test is correctly sized even in cases where the time series are almost nonstationary. The test is also powerful specially when the time series are stationary in mean and that volatility are contained only in fewer clusters. We illustrate the method in global stock prices data.
... The past two decades have made it clear-owing to ever-increasing global financial integration-that cross-border interdependencies increase risk dependency between global financial markets, as the global financial crisis of 2007-2009 and the European sovereign debt crisis of 2010-2012 have shown. These events also illustrate that the repeated occurrence of turbulence in the international environment can increase the likelihood of extreme risk transfer or a spillover effect from one financial market to other markets in the sense of a "domino effect," thereby destabilizing several markets and even the entire financial system (Markwat et al., 2009;Ren et al., 2022). Examining the connectedness between global private equity markets can provide important insights for investors, portfolio managers, policymakers, and regulators. ...
This study examines return and volatility spillovers between different regional private equity markets and investment styles to analyze the dynamics of connectedness. Using the LPX Group’s listed private equity indices from 2004 to 2023, we find significant fluctuations in return and volatility spillovers over time, with peaks occurring during major financial events. Notably, the peaks in the volatility spillovers are more abrupt but less persistent than those in the return spillovers. Our analysis reveals no direct correspondence between return and volatility spillovers, suggesting that they measure different aspects that should be considered in active portfolio management. The LPX America index is a net transmitter for the LPX Europe index, except during specific European events. In addition, the LPX Buyout index is identified as a consistent net transmitter of return spillovers, whereas the LPX Mezzanine index shows higher net volatility spillovers. Conversely, the LPX Venture index is consistently a net receiver, highlighting its diversification potential for both private equity and traditional stock market investors. These findings provide essential insights into portfolio allocation, risk management, and strategic planning in private equity investing.
... In the process of deregulations, the markets have integrated; hence, the spillovers occurred, resulting in less scope for diversification. However, these processes have immensely helped investors access qualitative information (Forbes and Rigbbon., 2002;Markwat et al., 2009). ...
This study examines the connectedness among the sectoral indices for the USA, India, France, Germany and Russia stock markets pre and post-COVID-19. We use the Diebold and Yilmaz spillover index to examine the study's objectives. This study finds that volatility spillover is higher during COVID-19 than before COVID-19. In addition, the volatility transmission across the sectors demonstrated mixed results regarding net volatility receivers and transmitters. However, the degree of transmission is higher for the net volatility receivers than for the net volatility transmitters. This study will help policymakers draft related policies to immunise their economy and market from spillover contagions of international markets during varying pandemic scenarios. This study would also help potential investors, including foreign institutional investors, diversify their portfolios based on the sectors with net volatility transmitters and receivers. JEL Codes: G11, G15, G41 SDG: SDG 17, Target 17.D
... Recent crises such as the global financial crisis, the European debt crisis, and the latest COVID-19 crisis are typically characterized as having high volatility in asset returns and contagious effects across financial asset classes (Khalfaoui et al., 2021a(Khalfaoui et al., , 2021bMarkwat et al., 2009;Baek et al., 2020). Stereotypically, asset return correlations across markets increase during crisis periods reducing diversification benefits (Diamandis, 2009;Balli et al., 2019). ...
... On the contrary, if the portfolio consists of highly correlated assets, then a fall would lead to southward movement in the other (Rajwani & Kumar, 2019). Previous studies indicate the correlation between the assets changes due to passage of time and turbulence in the markets and their spillover effect (Longin & Solnik, 1995, 2001Chiang et al., 2007;Markwat et al., 2009;Sensoy 2015). Unlike equity and bond market, energy and metals are viewed as safer investment opportunities especially during turbulent times (Abanomey and Mathur, 2001;Georgiev, 2001;Hillier et al., 2006;Gorton and Rouwenhorst, 2006;Chong & Miffre, 2010;Büyükşahin et al., 2009;Belousova and Dorfleitner, 2012, Yaya et al. 2016, Akbar et al., 2019. ...
This paper examines the dynamic linkages of volatility of energy commodities with bullion and the metal market. The proxies of energy commodities are crude oil and natural gas; bullion markets are Gold, silver and platinum and metal markets are copper and zinc. We collect daily data extending from March 18, 2010, to January 15, 2021, a period for about 12 years and employ Granger causality, Dynamic Conditional Correlation (DCC), Diebold Yilmaz (2012), Baruník & Křehlík (2018), and Network analysis for the purpose of examining spillover effect in the data considered. It is observed that there are short-run dynamic spillovers from energy (crude oil) to metal (copper) while long-run linkage is witnessed among all the constituent series. Further, Baruník & Křehlík (2018) test reveals that the total connectedness of the seven data series under study are found to be higher in frequency 2 (6 days to 15 days) than in the short run and long run. Referring to the network analysis, negative correlations are found between each pair of indices considered, i.e., Gold, silver, platinum, zinc, copper with crude oil while positive correlation is witnessed between Gold and silver. In addition, we determine portfolio hedge ratios and portfolio weights for the investors and portfolio managers. It is found that the Crude /Zinc pair had the most expensive optimal hedge ratio, while Crude/Gold had the least expensive hedging.
... One area that is very important in addressing the Covid-19 epidemic is the economy since it will affect the state's obligation to address social difficulties brought on by the pandemic. Economists say a significant economic crisis will affect how Covid-19 is handled in every nation (Markwat et al., 2009). ...
In the era of globalization, the movement of people from one country to another is the cause of the spread of Covid-19. During this global pandemic, the role of the Indonesian Ministry of Foreign Affairs is as an actor who formulates and makes policies. The Covid-19 phenomenon demands the role of the Ministry of Foreign Affairs (Kemenlu) of the Republic of Indonesia (RI) to determine Indonesia's foreign policy in preventing and overcoming the impact of Covid-19. Based on this, research is needed to reconstruct Indonesia's foreign policy model to prevent and overcome the impact of Covid-19 in the era of globalization as the state's responsibility to society. The method used in this research is a qualitative method with a descriptive type of research. This study finds that Indonesia's foreign policy to prevent Covid-19 is to encourage virtual international meetings to unite other countries to resolve the Covid-19 crisis and protect Indonesian citizens (WNI) abroad. The results of the study found that the Indonesian Ministry of Foreign Affairs carried out the reconstruction of Indonesia's foreign policy model to deal with the impact of Covid-19, namely in Indonesian foreign policy.
... During times of market stress, such as a financial crisis, panic can lead to a domino effect where a shock in one market triggers reactions in others (Markwat et al., 2009). For example, if there's a sudden market sell-off in stocks, it could lead to increased demand for safe-haven assets like Gold and US Treasuries. ...
In recent years, financial markets have experienced unprecedented uncertainties resulting from challenges such as the COVID-19 pandemic, energy shocks, and inflation mechanisms. This study investigates the interconnectedness of different financial markets (such as stocks, bonds, forex, oil, gold, and bitcoin) across extreme quantiles of volatility. To capture volatility spillovers, energy shocks, and inflation mechanisms, the study employs a novel technique called quantile-VAR, as traditional mean-based measures may not be suitable in extreme market conditions. The empirical findings indicate an increased density of networks in both the lower and upper tails of asset volatilities. Moreover, the results demonstrate an asymmetric impact of the COVID-19 outbreak, energy shocks, and inflation, with right-tail dependencies being more significant and common compared to left-tail dependencies. Additionally, the analysis of time-varying effects reveals significant shock events, ranging from the Shale Oil Crisis to the COVID-19 outbreak, including energy shocks stemming from the recent Russia-Ukraine war. These findings have important implications for investors, financial markets, fund and portfolio asset managers, and policymakers in managing risk, particularly during large shock events.
... In the case of equities, decades of deregulation and financial market and regulatory convergence have increased equity market integration and volatility spillovers. These changes have, therefore, reduced opportunities for diversification, but, conversely, magnified the value of such information to investors over time (Forbes and Rigobon, 2002;Markwat et al., 2009). ...
This study uses time-frequency analysis to examine directional connectedness between US sector equity ETFs, oil, gold, stock market, and uncertainty factors over the short and long terms. Frequency-based spillover index and portfolio hedging methods are applied to develop the empirical results. In analysing directional connectedness, we find that the market's 30-day forward looking expectations of US stock market volatility (VIX) has the strongest effect on the US sector equity ETFs in both the short and long runs. This is followed by the 30-day forward looking expectations of oil price volatility (OVX). Of the uncertainty factors, US economic policy uncertainty has the smallest impact on sector ETFs. Oil has a stronger effect on sector ETFs than gold in the short and long runs. Spillovers between the sector ETFs, gold, oil, and uncertainty factors, are asymmetric for both short and long runs, stronger in the short term, and noticeably increase in times of financial turmoil and economic uncertainty. Portfolio hedging results show that oil is the most effective hedge for each sector ETF in both the short term and the long term. The highest hedging effectiveness is observed for the Consumer Staples ETF.
... Several studies have used the discussed methods to evaluate tail risk connectedness in equity markets. For instance, Baur and Schulze (2005), Christian and Ranaldo (2009) and Markwat et al. (2009) all use the multinominal logit model of co-exceedances of Bae et al. (2003) to measure tail-connectedness amongst various stock markets. Beine et al. (2010) apply the co-exceedances of Cappiello et al. (2006) to 17 mature markets and find that financial liberalization had a positive effect on the left tail of stock returns. ...
Our study uses the quantile vector autoregressive (QVAR) network approach to compare the median-based and tail connectedness in BRICS equity markets using daily time series spanning from 3rd March 2020 to 9th September 2022. The study is conducted on both returns and volatility series, and the findings from our static and dynamic analysis can be summarized as follows. From the static perspective, we observe stronger connectedness and spillover effects on the left and right (right only) tails for returns (volatility) series. For the returns series, China and South Africa (Brazil, Russia and India) are net receivers (transmitters) of shocks at the left tail and median quantiles whilst China and Russia (Brazil, India and South Africa) are net receivers (transmitters) at the right-tail, whereas for the volatility series China and India (Brazil, Russia and South Africa) are the net receivers (transmitters) at both quantile tails, whilst Brazil (Russia, India, China and South Africa) is (are) the net receiver(s) (transmitters) at the median. From a dynamic perspective, time-varying total connectedness is higher at the median (tail-end) quantile(s) during the COVID-19 pandemic (Russia–Ukraine war). Moreover, the time-varying market-specific analysis distinguishes which individual equities are most or least vulnerable to systemic tail-risk transmission effects during the COVID-19 pandemic and more recent Russia–Ukraine. Ultimately, these findings are relevant for investors in their search for better hedging opportunities in equity markets as well as for market regulators who can use systematic risk as an early warning signal for contagion and market crash.
... Another example is the collapses in Global Stock Markets. The authors of the article [3] modeled local, regional and global crashes and came to the conclusion that global crashes do not start suddenly, they occur according to the domino principle: everything starts with local markets, then they infect regional ones. That is, minor crashes today significantly increase the probability of a major crash tomorrow. ...
The theory of ``Markov-up'' processes is being developed. This is a new class of stochastic processes with ``partial'' markovian features; it could also be called ``one-sided Markov''. Such a behavior may be found in the real world and in technical literature. So, naturally, phenomena of this type require special mathematical models. This paper follows the proposal of such a model published recently where the issue of recurrence and positive recurrence was investigated. In this article the exponential recurrence of the same process is established under appropriate assumptions, which potentially leads to an exponential rate of convergence to the invariant measure.
... On the contrary, if the portfolio consists of highly correlated assets, then a fall would lead to southward movement in the other (Rajwani & Kumar, 2019). Previous studies indicate the correlation between the assets changes due to passage of time and turbulence in the markets and their spillover effect (Longin & Solnik, 1995, 2001Chiang et al., 2007;Markwat et al., 2009;Sensoy 2015). Unlike equity and bond market, energy and metals are viewed as safer investment opportunities especially during turbulent times (Abanomey and Mathur, 2001;Georgiev, 2001;Hillier et al., 2006;Gorton and Rouwenhorst, 2006;Chong & Miffre, 2010;Büyükşahin et al., 2009;Belousova and Dorfleitner, 2012, Yaya et al. 2016, Akbar et al., 2019. ...
This paper examines the dynamic linkages of volatility of energy commodities with bullion and the metal market. The proxies of energy commodities are crude oil and natural gas; bullion markets are Gold, silver and platinum and metal markets are copper and zinc. We collect daily data extending from March 18, 2010, to January 15, 2021, a period for about 12 years and employ Granger causality, Dynamic Conditional Correlation (DCC), Diebold Yilmaz (2012), Baruník & Křehlík (2018), and Network analysis for the purpose of examining spillover effect in the data considered. It is observed that there are short-run dynamic spillovers from energy (crude oil) to metal (copper) while long-run linkage is witnessed among all the constituent series. Further, Baruník & Křehlík (2018) test reveals that the total connectedness of the seven data series under study are found to be higher in frequency 2 (6 days to 15 days) than in the short run and long run. Referring to the network analysis, negative correlations are found between each pair of indices considered, i.e., Gold, silver, platinum, zinc, copper with crude oil while positive correlation is witnessed between Gold and silver. In addition, we determine portfolio hedge ratios and portfolio weights for the investors and portfolio managers. It is found that the Crude /Zinc pair had the most expensive optimal hedge ratio, while Crude/Gold had the least expensive hedging.
... Over the past few years, increased financial market integration has reduced traditional diversification benefits (Markwat et al., 2009), leading investors to seek alternative assets such as commodities like crude oil and gold. These commodities are viewed as strategic assets for risk management and profit (Naeem et al., 2020), attracting interest from various investors, hedgers and academics. ...
Purpose
This study examines the risk spillovers between Indonesian sectorial stocks (Energy, Basic Materials, Industrials, Consumer Cyclicals, Consumer Non-cyclical and Financials), the aggregate index (IDX) and two commodities (gold and West Texas Intermediate Crude Oil [WTI] futures).
Design/methodology/approach
The study uses two methodologies: the TVP-VAR model of Antonakakis and Gabauer (2017) and the quantile connectedness approach of Ando et al. (2022). The data cover the period from October 04, 2010, to April 5, 2022.
Findings
The results show that the IDX, industrials and materials are net transmitters, while the financials, consumer noncyclical and energy sectors are the dominant shock receivers. Using the quantile connectedness approach, the role of each sector is heterogeneous and asymmetric, and the return spillover is stronger at lower and higher quantiles. Furthermore, the portfolio hedging results show that oil offers more diversification gains than gold, and hedging oil is more effective during the pandemic.
Practical implications
This study provides valuable insights for investors to diversify their portfolios and for policymakers to develop policies, regulations and risk management tools to promote stability in the Indonesian stock market. The results can inform the design of market regulations and the development of risk management tools to ensure the stability and resilience of the market.
Originality/value
This study is the first to examine the spillovers between commodities and Indonesian sectors, recognizing the presence of heterogeneity in the relationship under different market conditions. It provides important portfolio diversification insights for equity investors interested in the Indonesian stock market and policymakers.
... Bae et al. (2003) used extreme return co-exceedances test, and found that extreme negative return strongly supported the contagion effect. Founded results show that extreme shocks are nonlinear (Kaminsky and Reinhart 2003;Markwat et al. 2009;Xu 2012;Belanes et al. 2015). These approaches, however, differed in modeling extreme values. ...
In this paper, we propose a new approach to studying the spread of financial crises, their effects, and origins. To do this, an empirical measure of the degree of crisis transmission is introduced in the context of a crisis propagation model that corresponds to a multifactorial switching model with random endogenous transition variable. The latter is modeled as a diffusion process and allows us to determine whether crisis transmission is perfect, partial, or weak and whether it is due to contagion or interdependence effects. In addition, the model takes into account the relative impact of idiosyncratic and global factors in crisis and non-crisis periods, as well as any lag in the crisis transmission process. We used the genetic algorithm as an empirical method, because it uses probabilistic rather than deterministic transition rules, which is appropriate for our work. Our results suggest that the subprime crisis is perfectly or partially transmitted to developed markets and interdependence effects are due to most of them. However, the transmission to emerging markets is only partial or weak and, in most cases, due to contagion effects. Moreover, the significance of the coefficients of idiosyncratic factors was not related to crisis effects. For many countries, these coefficients were higher than the coefficients of the global factors, while crisis transmission was due to contagion effects. Our results exceed those of alternative studies on crisis transmission and provide important portfolio and risk management insights. By understanding the crisis transmission mechanism, investors and risk managers can make appropriate decisions to hedge against market downturns and reduce risk out of the country.
... A menor correlação obtida, de 0.06, entre o índice norte-americano S&P 500 e o chinês SSE, indica que ambos os mercados são praticamente independentes entre si. Uma explicação para as baixas correlações está na variação dos fusos horários entre os países estudados (Markwat, Kole, & Van Dijk, 2009) -o dia de atividades das bolsas começa na Ásia, move-se pela Europa e termina nos Estados Unidos e Brasil, de maneira que estes dois mercados não podem afetar os asiáticos em um mesmo dia. Por outro lado, a alta correlação entre os mercados do Brasil e EUA pode ser explicada pela proximidade entre os dois países, indicando a influência dos EUA na América Latina. ...
Este artigo tem como objetivo analisar o inter-relacionamento entre os mercados acionários dos BRICS e o mercado de ações norte-americano. Para a obtenção dos resultados, aplicaram-se métodos econométricos a dados diários das bolsas estudadas. Para medidas das relações a curto prazo, foram utilizados o coeficiente de correlação Pearson e o teste da causalidade Granger. No estudo dos efeitos de longo prazo aplicou-se o teste da cointegração Johansen. Detectou-se correlação positiva entre todos os índices estudados, com destaque para a forte correlação entre os índices brasileiro e o norte-americano. Obteve-se causalidade do tipo Granger entre os índices pesquisados, com destaque aos índices brasileiro e norte-americano, que mostraram causalidade sobre todos os demais índices. O índice brasileiro não sofreu efeito de causalidade de nenhum outro país, exceto dos Estados Unidos. Para o longo prazo, considerando todos os índices em uma única medida, foi mostrada a existência de cointegração entre os mercados acionários do BRICS e S&P 500.
... This phenomenon may affect a large number of firms at once, which may crash the whole stock market. Moreover, it may affect large numbers of other financial markets through spillover due to higher globalization, size of the affected market, and connectedness of global financial markets (Markwat, Kole, & Van Dijk, 2009;Patel & Sarkar, 1998). There is a long history of these global financial market disruptions starting from the Great Depression of the 1930s and includes the recent COVID-19 pandemic of 2019. ...
The full extent of the COVID-19 pandemic is still unfolding and has evolved from a public health crisis to a major economic crisis. Its impact is felt by most businesses and capital markets worldwide. Canada is one of the G7 economies that felt the enormous economic and social impact of the pandemic. In this study, an Ordinary Least Square (OLS) model was used to assess the impact of the COVID-19 pandemic on the Toronto Stock Exchange from February 24, 2020 to December 31, 2021. Growth in the confirmed COVID cases, ICU admissions, and government restrictions negatively impacted the Toronto Stock market returns; however, growth in hospitalizations positively impacted them. The sub-sectors of consumer discretionary, industrial, and financial services ranked in the top three positions respectively on the basis of risk-adjusted returns, while health care was positioned at the bottom of all ten sub-sectors. Furthermore, small caps outperformed the large caps and TSX composite index. Some of the reported findings were consistent with prior studies; however, a few new findings were also revealed. Policy implications and a more comprehensive conclusion is discussed at the end of the study.
... One should also mention the latest crisis, namely the coronavirus pandemic of 2020. Such episodes are characterized by high volatility (Markwat, Kole, & van Dijk, 2009). ...
High volatility and the contagion effect have led investors to consider alternative instruments as a part of their portfolios to be able to diversify away from the increasing risk in the stock markets. As alternative instruments, one can consider investing in such metals as gold, silver, copper, and platinum. This paper investigates the dynamic relationship between gold, silver, platinum, copper, and the Central European stock markets. The aim of this article is to identify if those metals can be considered as safe haven instruments for investors from the Czech Republic, Hungary, Poland, and Slovakia. The considered period is from 01.01.2007 to 30.06.2020. The calculations of DCC-GARCH model parameters were made by using the professional program OxMetrics by J.A. Doornik. There were 22 metal/metal or metal/index DCC-GARCH realization carried out. Significant differences exist in the correlation structure for two groups of metals. Gold and silver can be considered as an investment asset. Platinum and copper are mainly industrial metals. From this research, one can define silver as a safe haven instrument. During the financial crises, one can also observe the negative values of correlations between gold and indices, which means that gold served as a safe haven.
... Changes in the dependence structure, particularly during tumultuous market periods, is one of the main concerns of portfolio managers and market participants. During a crisis, the correlations between equity markets intensify due to spillover effects (see e.g., Markwat et al. (2009); Rose and Spiegel (2010); Samarakoon (2011); Hwang (2014); Luchtenberg and Vu (2015); Nikkinen et al. (2020); ...
In this paper, we use a bivariate VAR-asymmetric-BEKK-GARCH model to examine returns,
asymmetric volatility spillovers, and time-varying correlations among GCC stock markets (Saudi
Arabia, UAE, Qatar, Kuwait, Oman, and Bahrain) and five global factors (Islamic stocks, oil, gold,
bonds, and real estate) from July 5, 2004, to March 31, 2021. To take into account the effects of the
global financial crisis (GFC) and recent COVID-19 pandemic, we divide the sample period into four
sub-periods: the full sample without COVID-19, pre-GFC, post-GFC, and the COVID-19 crisis. The
empirical results indicate significant return and volatility spillovers between the GCC stock markets
and global factors. Moreover, these spillovers between GCC stock markets and global factors increase
in both the return and variance during turbulent periods (post-GFC and COVID-19 crisis periods). The
time-varying correlations reveal that gold serves as a hedge and safe haven against most of the GCC
stock markets in all sample periods, whereas the results vary across markets and sample periods for
bonds, oil, Islamic stocks, and real estate assets against the GCC stocks. Our findings provide useful
insights for investors and portfolio managers formulating trading strategies, determining asset
allocation, and assembling optimal portfolios, since they persistently pursue challenging investment
ideas and alternative asset classes, especially at times of financial crisis and global recession.
... Changes in the dependence structure, particularly during tumultuous market periods, is one of the main concerns of portfolio managers and market participants. During a crisis, the correlations between equity markets intensify due to spillover effects (see e.g., Markwat et al. (2009); Rose and Spiegel (2010); Samarakoon (2011); Hwang (2014); Luchtenberg and Vu (2015); Nikkinen et al. (2020); ...
In this paper, we use a bivariate VAR-asymmetric-BEKK-GARCH model to examine returns, asymmetric volatility spillovers, and time-varying correlations among GCC stock markets (Saudi Arabia, UAE, Qatar, Kuwait, Oman, and Bahrain) and five global factors (Islamic stocks, oil, gold, bonds, and real estate) from July 5, 2004, to March 31, 2021. To take into account the effects of the global financial crisis (GFC) and recent COVID-19 pandemic, we divide the sample period into four sub-periods: the full sample without COVID-19, pre-GFC, post-GFC, and the COVID-19 crisis. The empirical results indicate significant return and volatility spillovers between the GCC stock markets and global factors. Moreover, these spillovers between GCC stock markets and global factors increase in both the return and variance during turbulent periods (post-GFC and COVID-19 crisis periods). The time-varying correlations reveal that gold serves as a hedge and safe haven against most of the GCC stock markets in all sample periods, whereas the results vary across markets and sample periods for bonds, oil, Islamic stocks, and real estate assets against the GCC stocks. Our findings provide useful insights for investors and portfolio managers formulating trading strategies, determining asset allocation, and assembling optimal portfolios, since they persistently pursue challenging investment ideas and alternative asset classes, especially at times of financial crisis and global recession.
... Christiansen and Ranaldo (2009), Lucey and Sevic (2010), Thomadakis (2012), Dajcman (2013) and Horváth, Lyócsa, and Baumöhl (2018) applied this methodology on the stock markets from the European Union. Markwat, Kole, and Van Dijk (2009) made modification in the framework based on the ordered logit regressions in order to model the occurrence of local, regional and global crashes as function of their past occurrences and financial variables. They showed that contagion occurs as a domino effect, where confined local crashes evolve into more widespread crashes. ...
The aim of the paper is to analyze the transmission of shocks from selected developed and Southeastern European stock markets to the stock market of North Macedonia. Using the Bae, Karolyi, and Stulz (2003) co-exceedance methodology, we find that the probability of contagion from the stock markets of United States, Serbia and Bosnia and Herzegovina to the Macedonian stock market increased during the Global Financial Crisis. Regarding the asset classes, we show that contagion is positively associated with the volatility of Eurostoxx50 index, while negatively with the return of the euro dollar exchange rate and the yield of the 10-year US Treasury Note. The results have important implications for portfolio diversification and the asset allocation decisions of investors.
... Munculnya dikotomi antara negara dengan pendapatan tinggi atau menengah, menjadi sesuatu yang tepat karena kondisi pandemi menunjukan bahwa dampak ekonomi dan kesehatan menyebar dengan cepat ke negara-negara dengan tingkat pendapatan yang rendah dan menengah, di mana sistem dan sumber daya kurang siap untuk merespons dengan tepat (Beteringhe, Pieptea, Arsith, & Stanciu, 2020, p. 251). Beberapa pemerhati ekomi dunia memprediksi bahwa kombinasi yang mengakibatkan guncangan pada kurva penawaran dan permintaan yang negatif dari Covid-19, akan memunculkan spillover effect yang serupa dengan krisis keuangan global (Markwat, Kole, & Van Dijk, 2009). Di sinilah peran hubungan internasional menjadi sangat penting bagi negara-negara di dunia. ...
p>Politik luar negeri adalah dasar dari hubungan internasional. Penyebaran Corona Virus Disease 2019 (Covid-19) menjadi gangguan serius bagi banyak negara di dunia. Situasi urgensi tersebut membuat multilateralisme yang telah dibangun mengalami pelemahan yang disebabkan oleh ide-ide nasionalis dan populis dari masyarakat di masing-masing negara yang berusaha menjamin keselamatannya. Artikel ini disusun untuk menjawab pertanyaan mendasar mengenai politik luar negeri sebagai pedoman tindakan negara dalam menghadapi pandemi. Penulis melihat bahwa dikotomi antara negara-negara berpenghasilan tinggi dan menengah tampaknya menjadi hal yang tepat ketika kita melihat bahwa kondisi pandemi menunjukkan bahwa dampak ekonomi dan kesehatan akan menyebar dengan cepat ke negara-negara berpenghasilan rendah dan menengah, di mana sistem dan sumber daya kurang siap untuk merespon dengan tepat. Artikel ini disusun dengan menerapkan metode penelitian kualitatif dengan studi literatur untuk mengidentifikasi bagaimana dua negara yang tergolong negara berpenghasilan menengah di Asia Tenggara, yaitu Indonesia dan Malaysia, dalam menyusun dan membuat sejumlah kebijakan luar negeri untuk mengatasai persoalan dan kekurangan sumber daya kedua negara tersebut, dalam mencari cara menyusun ulang agenda pembangunan yang telah direncanakan sebelum terjadinya krisis kesehatan global yang menimbulkan ketidakpercayaan terhadap institusi, otoritas, dan bahkan elit internasional.
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... Changes in the dependence structure, particularly during periods of market turmoil, are of great concern to market participants and policymakers. During a crisis, the correlations between equity markets intensify due to spillover effects (see, e.g., Hwang 2014;Markwat et al. 2009;McIver and Kang 2020;Nikkinen et al. 2020;Rose and Spiegel 2010;Samarakoon 2011). In response, investors should adjust their portfolios taking cross-market spillovers into consideration to mitigate contagion risks. ...
This study investigates return and asymmetric volatility spillovers and dynamic correlations between the main and small and medium-sized enterprise (SME) stock markets in Saudi Arabia and Egypt for the periods before and during the COVID-19 pandemic. Return and volatility spillovers are modelled using a VAR-asymmetric BEKK–GARCH (1,1) model, while a VAR-asymmetric DCC–GARCH (1,1) model is employed to model the dynamic conditional correlations between these markets, which are then used to determine and explore portfolio design and hedging implications. The results show that while bidirectional return spillovers between the main and SME stock markets are limited to Saudi Arabia, shock and volatility spillovers have different characteristics and dynamics in both main–SME market pairs. In addition, the dynamic correlations between the main and SME markets are mostly positive and have notably increased during the COVID-19 pandemic, particularly in Saudi Arabia, suggesting that adding SME stocks to a main stock portfolio enhances its risk-adjusted return, especially during tranquil market phases. One practical implication of our results is that the development of SME stock markets can indirectly contribute to economic development via the main market channel and provide an avenue for portfolio diversification and risk management.
... The current literature examines the relationship between the stock market and the real economy, for example, Atje et al. [24], Korajczyk [25], and Levine et al. [26] found a strong positive relationship between the stock market and economic growth. However, most of those studies were based on aggregate stock market indices [27]. We aimed to provide further evidence by analyzing the effect of stock price risk on the development ability of individual firms. ...
Share pledging has become popular as a method of loan collateral among Chinese shareholders. Our research used a sample of Chinese listed firms between 2008–2018 and produced two main findings. Firstly, we found a negative association between stock price risk and firm profitability. Our second finding was that the interaction effect of share pledging and stock price risk is greater on firm profitability than the effect of stock price risk itself. We examined the role of share pledging by modeling pooled OLS and fixed effects using share pledging behavior, controlling shareholders’ share pledging and the share pledging ratio to reinforce the robustness of our results. Furthermore, we investigated the Davis Double Play effect of share pledging to analyze how share pledging affects stock price risk. We found that higher EPS and investor expectations cannot mitigate the positive impact of share pledging on stock price risk. That is, the reduction of EPS and the deterioration of investor expectations caused by share pledging risk will not further aggravate the stock price risk, as shareholders may have taken some managerial actions to affect the transmission mechanism.
... In particular, a straightforward method to study contagion in equity markets is based on linear dependence measure; see Forbes and Rigobon (2002). More advanced techniques include co-exceedance measures in multinomial logistic regressions (e.g., Bae et al., 2003;Markwat et al., 2009) or in quantile regressions (Baur and Schulze, 2005); Markov switching models (Ang and Bekaert, 2002); switching-parameter copulas (Rodriguez, 2007), quantile-based approach (Baur, 2013;Cappiello et al., 2014). ...
Our study provides new evidence on asymmetric dependencies in international government bond markets, by examining bonds from developed, emerging, and frontier countries, using a quantile regression methodology. We find that the dependence structure for emerging and frontier markets significantly changes during financial crisis periods, which we show has important implications for international diversification of investment strategies. Moreover, we also examine in detail stock-bond correlations and uncover several instances of decoupling. In contrast, developed markets exhibit a more stable dependence pattern. In addition, we document that the degree and structure of dependence vary when foreign currencies are hedged or unhedged, and across bond maturity segments.
... Recent crises such as the dotcom and subprime were characterized by high volatility and contagion effects (Forbes and Rigobon, 2002;Markwat et al., 2009). Authors like Chan-Lau et al. (2004) and Diamandis (2009) have shown that during those crises, the correlations between the world's equity markets had increased, thereby lowering the diversification benefit potential that can be gained from investing in traditional stocks. ...
... Recent crises such as the dotcom and subprime were characterized by high volatility and contagion effects (Forbes and Rigobon, 2002;Markwat et al., 2009). Authors like Chan-Lau et al. (2004) and Diamandis (2009) have shown that during those crises, the correlations between the world's equity markets had increased, thereby lowering the diversification benefit potential that can be gained from investing in traditional stocks. ...
We empirically examine the connectedness between the oil market and the major precious metals (gold, silver platinum, palladium) and the base metal copper over the available period covering December 06, 1988 to August 31, 2018, using the wavelet coherence and quantile cross-spectral analyses. The major findings can be summed up as follows. First, regarding the connectedness among the considered precious metal markets, there is no evidence of identifying the causal interplays. Second, gold and platinum are highly connected with oil and they influence oil prices, especially during global markets' turmoil. Third, the cross-quantile coherency analysis shows that gold and silver exhibit the highest quantile coherency. Fourth, the intensity of the nexus between gold and copper attains its nadir at the extreme upper and lower quantiles. Our empirical findings have relevant implications for investors. It is important for investors in commodity markets to make appropriate investment market decisions in extreme market circumstances. On the other hand, policymakers may benefit from our research, as they could generate suitable strategies.
... Two representative papers would be that of Forbes and Rigobon (2002), who investigate the 1997 Asian crisis, the 1994 Mexican devaluation, and the 1987 U.S. market crash and Baig and Goldfajn (1999) for a wide variety of US news finding cross-border contagion in both currency and stock markets. Other key works that have developed on the initial work of Forbes and Rigobon (2002) include that of Corsetti et al. (2005), Kenourgios et al. (2011), Samarakoon (2011), Forbes (2004 and Markwat et al. (2009). In a first stage, we surface the impact of external shocks on the dynamic conditional correlation. ...
In 2014, Malaysia Airlines experienced two tragedies in quick succession, damaging the company's reputation and finances, with negative implications for Malaysian tourism. This research assesses the impact of this. We find that the share price response was immediate and substantive. The carrier implemented sweeping adjustments, while passenger traffic rapidly declined particularly in Asian markets. Malaysian Airlines augmented fare reduction after each accident to stem the ongoing leakage of passengers. Traffic from China witnessed sharp declines, signalling the severity of the incumbents' prognosis. We further examine the investor response and the ultimate government decision to nationalise and restructure.
This study explores the interdependencies among developed stock markets using the LASSO technique with quantile regression within a network analysis framework. Traditional forecasting methods often fail during volatile market conditions, necessitating innovative approaches that blend interconnectedness and factor modeling. By employing quantile regression, which examines financial assets across various distribution quantiles, this study addresses tail risk, a critical aspect of market behavior during crises. The network analysis framework provides insights into the relationships between stock markets, highlighting how variables interact within a complex system. The study assesses market behaviors at different quantile levels, considering clustering coefficients to analyze cycles, middlemen, ins, and outs. Additionally, it examines the impact of several factors on market interconnectedness, offering insights into the interplay of individual stocks with broader market conditions. Key findings demonstrate that incorporating interconnectedness factors into forecasting models enhances accuracy and informs better decision-making, leading to portfolios that can withstand extreme market conditions and provide superior risk-adjusted returns.
JEL Kodları: G10, G11 Özet Bu çalışmada, kıymetli metallerden (altın, gümüş, platin, paladyum) oluşturulacak bir portföyde, bu varlıkların muhtemel çeşitlendirme özellikleri üzerine bir araştırma yapılmıştır. Bu doğrultuda, kıymetli metaller arasındaki eşbütünleşme ilişkileri 01.02.2010-01.05.2023 dönemine ait aylık veriler kullanılarak Fourier Bootstrap ARDL sınır testi ve Fourier Bootstrap ADL testi ile incelenmiştir. Fourier Bootstrap ARDL sınır testi ve Fourier Bootstrap ADL testinden elde edilen sonuçlara göre, kıymetli metallerin uzun dönemde birlikte hareket etmedikleri tespit edilmiştir. Daha açık bir ifadeyle incelenen kıymetli metaller arasında eşbütünleşme ilişkisinin bulunmadığı ortaya konulmuştur. Buna göre kıymetli metallerden oluşturulan bir sepet ile portföy çeşitlendirilmesi yapmak mümkün gözükmektedir. Abstract This paper looked into the potential diversification properties of these assets in a portfolio made up of selected precious metals (gold, silver, platinum, palladium). The cointegration relations between precious metals were investigated using the Fourier Bootstrap ARDL Boundary Test and the Fourier Bootstrap ADL Test using monthly data from 01.02.2010 to 01.05.2023. The precious metals do not behave together in the long run, according to the results of the Fourier Bootstrap ARDL boundary test and the Fourier Bootstrap ADL test. To put it another way, it has been discovered that valuable metals have no cointegration relationship. As a result, it is possible that portfolio diversification can be done with a basket made of precious metals.
COVID-19 has resulted in significant setbacks to economy due to shocks to the consumer and services industries, in terms of a halt of production and operations, difficulty in making payments to employees, and scarcity of employment opportunities, disrupting the entire world economy. This study examines the connectedness among the sectoral indices for India, France, Germany, Russia, Italy, Argentina, Brazil, and Turkey stock markets during the COVID and pre-COVID periods. The sectors under consideration are consumer goods, energy, financials, industrials, real-estate, utilities, basic materials, media and communication, industrial goods, and IT. To ensure empirical robustness, first, we extracted the time-varying volatility series for each variable and used it as an input for applying Diebold and Yilmaz Spillover index. The study shows that during the COVID-19 period, the portfolio diversification provided more economic value compared to pre-COVID-19 period. These findings will help domestic and institutional investors diversify their investments across different sectors of the countries under consideration.
The paper lays the empirical foundation for the significance of Crude in explaining the variation in implied volatilities (IVs) of emerging markets nations constituting the MSCI emerging market index. Guided by the significance of Crude as a significant regressor, the study aims to investigate the association of currency IVs with Crude using a connectedness-based approach by Diebold and Yilmaz (2012). The spillover pattern highlights the strong interconnectedness of Asian currencies, with the Taiwanese dollar and Thai Baht feeding the systemic risk, thus the currencies to watch out for the policymakers. An important finding is that the Polish zloty possesses a high spillover risk in the Eastern European economies due to improved economic conditions and a large flow of capital during quantitative easing. On the other hand, Russia is a huge exporter of Crude and shares a limited spillover relationship with Crude, implying domestic macroeconomic conditions and geopolitical risk contribute more to the ruble fall. Based on the spillover pattern of IVs, a portfolio universe selection and weight allocation with dynamic balancing have been devised for investors of the forex market for spillover risk minimization. Findings show that the Chinese Yuan and Chilean Peso are the most favorable currency alongside Crude. However, Indian Rupee serves as the most promising currency pair to be inducted with Crude. The study is particularly beneficial for investors and portfolio managers investing in the forex market to induct the assets in the portfolio to mitigate systemic risk fear, especially during times of distress.
We introduce a large family of model selection tests based on the expectation of an arbitrary, possibly non-smooth, parametric criterion function of the data. The considered methodology is illustrated for several econometric problems, including linear and quantile regression. It covers the case of strictly locally non-nested models and some overlapping models. The asymptotic theory of the proposed test statistic is stated. A general exchangeable bootstrap scheme allows the evaluation of its limiting law as well as its asymptotic variance. Our framework includes the tests for non-nested model selection of Vuong (1989) and Clarke (2007) as particular cases. We show that the statistic of the latter test is not Binomial distributed as originally stated and we provide its corrected limiting law. In a simulation study, we empirically verify the distributional approximation of our test statistic in a finite sample and examine the empirical level and power of the corresponding model selection tests in various settings. Finally, an analysis of a financial dataset illustrates the proposed model selection procedure at work.
This paper probes deeper into the co-movement of Ghana's equity index and exchange rate with international equity markets and further determine whether these co-movements are driven by global uncertainties. Also, we sought to determine how the Ccovid-19 pandemic alters the dynamics of these relationships. We employ the wavelet technique to data from January 19, 2012 to March 1, 2021 to the split between pre-Covid-19 and Covid-19 periods. The results reveal that the dynamics of co-movement or interconnectedness of exchange rate and Ghana Stock Exchange composite index has evolved over time and across frequencies. Besides, the cone of influence, as shown by the wavelet spectrum, does not cover the entire data frequency which suggests that long-term forecast of exchange rate and equity index in Ghana beyond four years could be misleading since significant levels of interdependences are concentrated around the mid-team scales. In addition, we found evidence to support low-medium term lead-lag connections between exchange rate and Ghana Stock Exchange Composite Index in 2013 to 2014 and 2016. Further, the co-movement between exchange rate or Ghana Stock Exchange Composite Index and international equity markets show similarly weak association at all scales. A closer scan of the interdependencies among these variables are more intense during Covid-19 than during the pre-Covid-19 period. Finally, we observe a strong co-movement between the rise in Covid-19 cases and exchange rate at higher frequency scales where exchange rate lags Ghana's equity index and they are out-of-phase.
ÖZET
Postmodern çağda, gelişen teknolojik gelişmeler doğrultusunda ve de ardından hala daha içerisinde bulunduğumuz global Korona virüs pandemi sürecinden dolayı en başta sosyal medya olmak üzere birçok alanda gözetleme teknikleri şekil değiştirmiştir. Aşılamadan yeni sağlık kartlarına, akılı telefonlardan paralı televizyon kanalarına kadar birçok alanda farkına varılmadan gözetleniyoruz. Artık nereye gittiğimiz, kimle buluştuğumuz ve kimle konuştuğumuza rahatlıkla biliniyor. Örneğin, paralı televizyon kanalarından olan Diğitürk, Dsmart ve Netflix üyeliği için mail adreslerimizin, ev adreslerimizin ve de telefon numaralarımızın verilmesi gerekiyor. Bundan dolayı İnternet ve bununla
COVID-19 AND CURRENT ISSUES CONGRESS
OCTOBER 16, 2021
birlikte sosyal medya iktidar için bir denetim ve kontrol aracı olarak kullanılıyor. İktidar sahipleri kişilerden bilgi almak adına sosyal medya ve akılı telefon uygulamalarını etkili bir şekilde kullanmıştır. Bunun yanı sıra, kullanıcılar da gözetimin bir gösteri nesnesi ve objesi durumundadırlar. Örneğin, sosyal paylaşım siteleri arasında yer alan İnstagram, Facebook ve TikTok hem gözetlenip hem de gözlendiğimiz, bir başka değiş ile hem nesne hem de özne konumda olduğumuz gösteri çağının vazgeçilmez gösterge mekânları durumundadır. Mahremiyetin ortadan kalkması ve başkaları tarafından gözetlenmek ve gözetlemek hem bize huzur hem de aynı zamanda huzursuzluk hissi veriyor. Bu da bizi Lacan’nın bahsetmiş olduğu ‘jouissance’ kavramına götürüyor. Fink (1999: 8) aktarımında jouissance’ın “pleasure in pain, or satisfaction in satisfaction” olduğu ve Türkçedeki anlamının ise “acıdaki haz” veya “tatminsizlikteki tatmin” (Arıkan, 2015: 378) olarak çevrilmesi bu kavramın zevk ve acıyı bir arada bulundurduğu anlamına geldiğini söyleyebiliriz. Yani bir başka değiş ile bizler jouissance ve gözetleme tekniklerinin hem öznesi hem de nesnesi konumunda olup hem bundan zevk alıp hem de acı çekiyoruz. Bundan dolayı bu çalışmada örneklem olarak İnstagram, TikTok ve Facebook kullanılarak nesnesi ve öznesi olduğumuz zevk ve acının birleşimi konu alınarak covid-19 pandemisinde dolayı sosyal medya’nın panoptikon ötesinden çıkıp yeni bir şekle bürünmesi öne sürülecektir. Bu yeni şekli ise Tekhneoptikon, yani “yeteneği olan bireylerin veya mekanların televizyon programlarında yer alması” (Muhtaroğulları, 2019) olarak tanımlanmıştır. Sonuç olarak betimleyici ve eleştirel bir bakış açısı ile bu çalışmada sosyal paylaşım sitlerinden olan İnstagram, TikTok ve Facebook, gösteri, jouissance ve tekhneoptikon (Muhtaroğulları, 2019) kavramları ışığında ele alınarak incelenecektir.
Anahtar Kelimeler: Covid-9, sosyal medya, gözetim, jouissance, tekhneoptikon
This paper explores the effectiveness of gold as a hedging and safe haven instrument for a variety of market risks. Rather than confining the analysis to specific countries, we treat gold as a global asset and apply the novel Phillips, Shi and Yu (2015a) and Phillips, Shi and Yu (2015b) methodology to identify extreme price movements. This method accounts for both the level and speed of changes in price dynamics that better characterises periods of abnormally high risks. We uncover safe haven properties for the European sovereign debt crisis, stock market crash, and oil inflationary pressures. We also show that gold exhibits hedging properties when investors are faced with currency, European sovereign debt, stock market, and oil inflation risks. Finally, we demonstrate that gold was a weak safe haven for investors during the 2020 Covid-19 crisis, and highlight the importance of accounting for speed and price levels in the identification of abnormal risk periods.
This paper examines the asymmetric volatility connectedness amongst the Dow Jones Islamic Market Index (DJIM) and the Brent crude oil, gold, and silver markets. We use the Diebold and Yilmaz methodology to examine asymmetric volatility connectedness associated with bad (negative semi-variance) and good (positive semi-variance) volatility in these markets. We identify significant volatility connectedness between the DJIM and commodity markets, with the DJIM and Brent oil markets being the largest net contributors of spillovers. Furthermore, the evidence on semi-volatility connectedness displays asymmetric behavior. Bad volatilities are associated with net transmission of spillovers to other markets, except for silver. Our results have significant implications for investors dealing with the DJIM and commodity markets in terms of asset management and diversification.
This paper examines co-movement of extreme returns in eight South Eastern European (SEE) stock markets during the period covering both the financial crisis from 2007-2009 and the COVID-19 health crisis. The analysis is based on coexceedances which represent the number of joint occurrences of extreme returns in a group of stock market indexes. To provide a valuable insight on how persistence, asset class, and volatility effects are related with the coexceedances, we utilize a multinomial logistic regression procedure. We find evidence in favour of the continuation hypothesis. However, the factors associated with the coexceedances differ between the SEE European Union (EU) members and the SEE EU accession countries. The EU members are more dependent on signals from major EU economies, while the accession countries are mainly impacted by regional signals. The implications of our analysis may help policy makers in understanding the nature of shock transmission in SEE stock markets.
This study develops a novel skewness-based integration measure to assess systemic risk across international equity markets. We exploit skewness to further consider the tail information of return distribution, thereby extend the return-based integration measure of Pukthuanthong and Roll (2009). The empirical results indicate that the skewness-based integration measure is closely correlated with market crashes, Value-at-Risk, and leading indicators of equity markets. Moreover, the skewness-based integration measure improves the information content of systemic risk relative to the return-based integration measure, implying that tail information plays an indispensable role in early warning of systemic risk.
Financial market crash is one of the most extreme manifestations of financial market instability. It is of great significance to study its underlying structure and its forecasting methods. From the perspective of Econophysics, in addition to the influence of factors such as fluctuation on the financial price crash, we consider that the financial price crash originates from the change of the underlying structure described by the nonlinear potential function in the financial system. So we first propose a new nonlinear potential GARCH model by introducing nonlinear potential function and combining with GARCH model. In order to only analyze the effects of potential functions and eliminate the effects of fluctuations on prices, we combine the realized volatility and propose the likelihood function estimations of the proposed model and the benchmark GARCH and ARCH models. Then, based on the 5-minute high-frequency data of CSI300 and WTI crude oil, the out of sample forecasting with rolling time window and the SPA test method with Bootstrap characteristics are calculated. Finally, Akaike information criterion and Bayesian information criterion are employed to test the Goodness of fit of three models for in-sample and out-of-sample. The dynamic forecasting performance of the proposed new nonlinear potential GARCH model is compared with that of the benchmark GARCH and ARCH models. The main empirical results show that the proposed new nonlinear potential GARCH model is better than the benchmark GARCH and ARCH models for forecasting the returns and prices in the financial price crash for the given data. In addition, the potential well of the underlying nonlinear potential function changes obviously in the financial price crash.
This research analyzes non-linear interdependencies between the Polish (WIG20) and the Spanish (IBEX 35) stock market returns with some other relevant international stock market returns, such as the German (DAX-30), the British (FTSE-100), the American (S&P 500) and the Chinese (SSE Composite) stock markets. In addition, this research focuses on the impact of the stage of the economy on these interdependencies, in concrete, on the influence of the 2008 Global Financial Crisis. To that end, we use a nonlinear autoregressive distributed lag (NARDL) approach in the sample period between January 1998 to December 2018. Our results show positive interdependencies between the Polish and the Spanish stock markets with the international reference stock markets analyzed in this research, as well as significant long-run relations between most of the stock markets. Furthermore, the Polish and the Spanish stock market returns may similarly react to positive and negative changes in international stock market returns, evidencing strong short-run asymmetry. In addition, both countries show great persistence in response to both positive and negative changes in stock market returns in the other mayor international markets. Finally, the NARDL model proposed in this research would show good explanatory power, mainly to changes in the international stock market returns, except for the Chinese market.
In the chaotic financial environment of Asia in 1997–1998, daily changes in stock prices of about 10 percent became commonplace. This paper analyses what type of news moved the markets in those days of market jitters. We find that movements were triggered by local and neighboring-country news, with news about agreements with international organizations and credit rating agencies having the most weight. However, some of those large changes cannot be explained by any apparent substantial news, but seem to be driven by herd instincts of the market itself. The evidence suggests that investors over-react to bad news.
The short-run interdependence of prices and price volatility across three major international stock markets is studied. Daily opening and closing prices of major stock indexes for the Tokyo, London, and New York stock markets are examined. The analysis utilizes the autoregressive conditionally heteroskedastic (ARCH) family of statistical models to explore these pricing relationships. Evidence of price volatility spillovers from New York to Tokyo, London to Tokyo, and New York to London is observed, but no price volatility spillover effects in other directions are found for the pre-October 1987 period. Article published by Oxford University Press on behalf of the Society for Financial Studies in its journal, The Review of Financial Studies.
This paper examines stock market co-movements. It begins with a discussion of several conceptual issues involved in measuring these movements and how to test for contagion. Standard tests examine if cross-market correlation in stock market returns increase during a period of crisis. The measure of cross-market correlations central to this standard analysis, however, is biased. The unadjusted correlation coefficient is conditional on market movements over the time period under consideration, so that during a period of turmoil when stock market volatility increases, standard estimates of cross-market correlations will be biased upward. It is straightforward to adjust the correlation coefficient to correct for this bias. The remainder of the paper applies these concepts to test for stock market contagion during the 1997 East Asian crises, the 1994 Mexican peso collapse, and the 1987 U.S. stock market crash. In each of these cases, tests based on the unadjusted correlation coefficients find evidence of contagion in several countries, while tests based on the adjusted coefficients find virtually no contagion. This suggests that high market co-movements during these periods were a continuation of strong cross-market linkages. In other words, during these three crises there was no contagion, only interdependence.
In the wake of the Mexican and Asian currency turmoil, the subject of financial crises have come to the forefront of academic and policy discussions. This paper analyzes the links between banking and currency crises. The authors find that problems in the banking sector typically precede a currency crisis--the currency crisis deepens the banking crisis, activating a vicious spiral; financial liberalization often precedes banking crises. The anatomy of these episodes suggests that crises occur as the economy enters a recession, following a prolonged boom in economic activity that was fueled by credit, capital inflows, and accompanied by an overvalued currency.
We provide empirical evidence that stock market crises are spread globally through asset holdings of international investors. By separating emerging market stocks into two categories, namely, those that are eligible for purchase by foreigners (accessible) and those that are not (inaccessible), we estimate and compare the degree to which accessible and inaccessible stock index returns co-move with crisis country index returns. Our results show greater co-movement during high volatility periods, especially for accessible stock index returns, suggesting that crises spread through the asset holdings of international investors rather than through changes in fundamentals. Copyright 2006 by The American Finance Association.
Using the Kullback-Leibler information criterion to measure the closeness of a model to the truth, the author proposes new likelihood-ratio-based statistics for testing the null hypothesis that the competing models are as close to the true data generating process against the alternative hypothesis that one model is closer. The tests are directional and are derived for the cases where the competing models are non-nested, overlapping, or nested and whether both, one, or neither is misspecified. As a prerequisite, the author fully characterizes the asymptotic distribution of the likelihood ratio statistic under the most general conditions. Copyright 1989 by The Econometric Society.
We characterize asset return linkages during periods of stress by an extremal dependence measure. Contrary to correlation analysis, this non-parametric measure is not predisposed towards the normal distribution and can account for non-linear relationships. Our estimates for the G-5 countries suggest that simultaneous crashes in stock markets are about two times more likely than in bond markets. Moreover, stock-bond contagion is about as frequent as flight to quality from stocks into bonds. Extreme cross-border linkages are surprisingly similar to national linkages, illustrating a potential downside to international financial integration.
The existing literature promotes a number of alternative methods to test for the presence of contagion during financial market crises. This paper reviews those methods, and shows how they are related in a unified framework. A number of extensions are also suggested which allow for multivarite testing, endogeneity issues and structural breaks.
This paper investigates whether fi?nancial crises are alike by considering whether a single modelling framework can fi?t multiple distinct crises in which contagion effects link markets across national borders and asset classes. The crises con- sidered are Russia and LTCM in the second half of 1998, Brazil in early 1999, dot-com in 2000, Argentina in 2001-2005, and the recent U.S. subprime mortgage and credit crisis in 2007. Using daily stock and bond returns on emerging and developed markets from 1998 to 2007, the empirical results show that fi?nancial crises are indeed alike, as all linkages are statistically important across all crises. However, the strength of these linkages does vary across crises. Contagion chan- nels are widespread during the Russian/LTCM crisis, are less important during subsequent crises until the subprime crisis, where again the transmission of con- tagion becomes rampant.
This study examines the effect of the October 1987 crash on the co‐movements among national stock markets. Interrelationships among the price movements in different national stock markets are analyzed using correlation and exploratory factor analysis. The data on weekly returns of 12 national stock market indices over the period from August 1984 to December 1990 are used in both local‐currency and U.S. dollar terms for the analysis. This study finds that national stock markets became more interrelated after the crash, and the strengthening co‐movements among national stock markets continued for a longer period after the crash. In addition, it is shown that the co‐movements among national stock markets were stronger when the U. S. stock market was more volatile. These results imply that after investors experienced the October crash, they tend to give more weight to international factors in making investment decisions after the crash than before.
This paper argues in favour of a closer link between the decision and the forecast evaluation problems. Although the idea of using decision theory for forecast evaluation appears early in the dynamic stochastic programming literature, and has continued to be used with meteorological forecasts, it is hardly mentioned in standard academic texts on economic forecasting. Some of the main issues involved are illustrated in the context of a two-state, two-action decision problem as well as in a more general setting. Relationships between statistical and economic methods of forecast evaluation are discussed and links between the Kuipers score used as a measure of forecast accuracy in the meteorology literature and the market timing tests used in finance are established. An empirical application to the problem of stock market predictability is also provided, and the conditions under which such predictability could be explained in the presence of transaction costs are discussed. Copyright (C) 2000 John Wiley & Sons, Ltd.
This paper argues in favour of a closer link between decision and forecast evaluation problems. Although the idea of using decision theory for forecast evaluation appears early in the dynamic stochastic programming literature, and has continued to be used in meteorological forecasts, it is hardly mentioned in standard academic textbooks on economic forecasting. Some of the main issues involved are illustrated in the context of a two-state, two-action decision problem as well as in a more general setting. Relationships between statistical and economic methods of forecast evaluation are discussed and useful links between Kuipers score, used as a measure of forecast accuracy in the meteorology literature, and the market timing tests used in finance, are established. An empirical application to the problem of stock market predictability is also provided, and the conditions under which such predictability could be exploited in the presence of transaction costs are discussed.
This article introduces a resampling procedure called the stationary bootstrap as a means of calculating standard errors of estimators and constructing confidence regions for parameters based on weakly dependent stationary observations. Previously, a technique based on resampling blocks of consecutive observations was introduced to construct confidence intervals for a parameter of the m-dimensional joint distribution of m consecutive observations, where m is fixed. This procedure has been generalized by constructing a “blocks of blocks” resampling scheme that yields asymptotically valid procedures even for a multivariate parameter of the whole (i.e., infinite-dimensional) joint distribution of the stationary sequence of observations. These methods share the construction of resampling blocks of observations to form a pseudo-time series, so that the statistic of interest may be recalculated based on the resampled data set. But in the context of applying this method to stationary data, it is natural to require the resampled pseudo-time series to be stationary (conditional on the original data) as well. Although the aforementioned procedures lack this property, the stationary procedure developed here is indeed stationary and possesses other desirable properties. The stationary procedure is based on resampling blocks of random length, where the length of each block has a geometric distribution. In this article, fundamental consistency and weak convergence properties of the stationary resampling scheme are developed.
This paper surveys a broad array of data to compare the scope and impact of three emerging market financial crises: the debt crisis of the 1980s, the Mexican financial crisis of 1994-95, and the current international financial crisis. While certain conventional views regarding the three episodes are supported by the data examined in this paper, we find that in several respects, the current crisis is more similar to prior emerging market crisis episodes than is commonly believed. (C) 1999 Elsevier Science Ltd. All rights reserved. JEL classification: F32; F41.
Recent events have drawn attention to the issue of contagion. Dependencies among countries will cause shocks to an individual country (or group of countries) to affect other countries, often on a regional basis. Such linkages are not contagion, but an increase in cross-market linkages after a shock to one country could be contagion. Weak countries' economic fundamentals, macro-similarities and exposures to certain type of financial agents and associated transmission channels are found to increase the risk of sudden spillovers. And the state of the international financial system can also play a role. Although much of contagion need not represent irrational behavior on the part of investors, much is still unknown what makes countries vulnerable to contagion and through which precise mechanisms it is transmitted. It is clear nevertheless that volatility will remain and that specific measures at the national level and the international financial architecture might be necessary to reduce these risks, manage their impact, and recover as efficiently as possible.
Testing the hypothesis that international equity market correlation increases in volatile times is a difficult exercise and misleading results have often been reported in the past because of a spurious relationship between correlation and volatility. Using “extreme value theory” to model the multivariate distribution tails, we derive the distribution of extreme correlation for a wide class of return distributions. Empirically, we reject the null hypothesis of multivariate normality for the negative tail, but not for the positive tail. We also find that correlation is not related to market volatility per se but to the market trend. Correlation increases in bear markets, but not in bull markets.
We review the different block bootstrap methods for time series, and present them in a unified framework. We then revisit a recent result of Lahiri [Lahiri, S. N. (1999b). Theoretical comparisons of block bootstrap methods, Ann. Statist. 27:386-404] comparing the different methods and give a corrected bound on their asymptotic relative efficiency; we also introduce a new notion of finite-sample “attainable” relative efficiency. Finally, based on the notion of spectral estimation via the flat-top lag-windows of Politis and Romano [Politis, D. N., Romano, J. P. (1995). Bias-corrected nonparametric spectral estimation. J. Time Series Anal. 16:67-103], we propose practically useful estimators of the optimal block size for the aforementioned block bootstrap methods. Our estimators are characterized by the fastest possible rate of convergence which is adaptive on the strength of the correlation of the time series as measured by the correlogram.
This study examines the magnitude and changing nature of volatility spillovers from Japan and the US to six Pacific–Basin equity markets. I construct a volatility spillover model which allows the unexpected return of any particular Pacific–Basin market be driven by a local idiosyncratic shock, a regional shock from Japan and a global shock from the US. I find that over and above the impact of the world factors, there are significant spillovers from the region to many of the Pacific–Basin countries. Liberalization events (such as capital market reform and country fund launching), exchange rate changes, number of DR listings, sizes of trade, and country fund premium are shown to affect the relative importance of the world and regional market factors over time.
This paper tests for the presence of non-linearities in the propagation of devaluation expectations among the countries that were members of the Exchange Rate Mechanism of the EMS. We show that whenever it is possible to estimate a model for financial interdependence, a full-information technique to detect such non-linearities is more efficient than the limited-information estimator proposed, in a similar context, by Rigobon (2000). This happens, in particular, when the periods of market turbulence are relatively short. Our evidence suggests that non-linearities in the propagation of devaluation expectations were a general phenomenon in the ERM. Normally the non-linearity amounts to a stronger effect in the same direction, but sometimes, as in the Dutch case, it implies a significant effect in the opposite direction: evidence of flight-to-quality.
This paper implements estimation and testing procedures for comovements of stock market “cycles” or “phases” in Asia. We extend the Harding and Pagan [Harding, D., Pagan, A.P., 2006. Synchronization of cycles. Journal of Econometrics 132 (1), 59–79] test for strong multivariate nonsynchronization (SMNS) between business cycles to a test that allows for an imperfect degree of multivariate synchronization between stock market cycles. Moreover, we propose a test for endogenously determining structural change in the bivariate and multivariate synchronization indices. Upon applying the technique to five Asian stock markets we find a significant increase in the cross country comovements of Asian bullish and bearish periods in 1997. A power study of the stability test suggests that the detected increase in comovement is more of a sudden nature (i.e. contagion or “Asian Flu”) instead of gradual (i.e. financial integration). It is furthermore argued that stock market cycles and their propensity toward (increased) synchronization contain useful information for both investors, policy makers and financial regulators.
We analyze the financial integration of the new European Union (EU) member states’ stock markets using the negative (positive) coexceedance variable that counts the number of large negative (large positive) returns on a given day across the countries. A similar analysis is performed for the old EU countries. We use a multinomial logit model to investigate how persistence, asset classes, and volatility are related to the coexceedance variables. We find that the effects differ (a) between negative and positive coexceedance variables (b) between old and new EU member states, and (c) before and after the EU enlargement in 2004, suggesting a closer connection of new EU stock markets to those in Western Europe.
We investigate the return comovement in international equity markets with a focus on the distinction between economic fundamentals and contagion. We examine the potential macro news effect based on a comprehensive data set of macroeconomic news announcements made in the U.S., U.K., and Japan. Our results show that the bulk of the observed comovement in the intraday and overnight returns of the international equity markets cannot be attributed to public information about economic fundamentals. In contrast, foreign market returns exert a dominant influence on the subsequent domestic market returns. Overall, our findings suggest that future inquiry on market comovement may focus on the distinction between contagion and trading on private information, rather than public information.
We investigate the link between extreme events on the currency and stock markets for 26 countries by estimating a simultaneous equations probit model, using a sample of 2500 daily returns in the period from 1996 to 2005. In a number of emerging markets that went through a period of crisis an extreme stock market decline increased the probability of extreme currency depreciation on the same day. For currency markets we find evidence of spillover of extreme events within regions, but limited influence outside the region. Extreme events on stock markets are much more interrelated globally, particularly when they originate from the US.
Systemic crises can have grave consequences for investors in international equity markets, because they cause the risk-return trade-off to deteriorate severely for a longer period. We propose a novel approach to include the possibility of systemic crises in asset allocation decisions. By combining regime switching models with Merton [Merton, R.C., 1969. Lifetime portfolio selection under uncertainty: The continuous time case. Review of Economics and Statistics 51, 247–257]-style portfolio construction, our approach captures persistence of crises much better than existing models. Our analysis shows that incorporating systemic crises greatly affects asset allocation decisions, while the costs of ignoring them is substantial. For an expected utility maximizing US investor, who can invest globally these costs range from 1.13% per year of his initial wealth when he has no prior information on the likelihood of a crisis, to over 3% per month if a crisis occurs with almost certainty. If a crisis is taken into account, the investor allocates less to risky assets, and particularly less to the crisis prone emerging markets.
Recent results in value at risk analysis show that, for extremely heavy-tailed risks with unbounded distribution support, diversification may increase value at risk, and that generally it is difficult to construct an appropriate risk measure for such distributions. We further analyze the limitations of diversification for heavy-tailed risks. We provide additional insight in two ways. First, we show that similar non-diversification results are valid for a large class of risks with bounded support, as long as the risks are concentrated on a sufficiently large interval. The required length of the support depends on the number of risks available and on the degree of heavy-tailedness. Second, we relate the value at risk approach to more general risk frameworks. We argue that in markets for risky assets where the number of assets is limited compared with the (bounded) distribution support of the risks, unbounded heavy-tailed risks may provide a reasonable approximation. We suggest that this type of analysis may have a role in explaining various types of market failures in markets for assets with possibly large negative outcomes.
This paper models dependence with switching-parameter copulas to study financial contagion. Using daily returns from five East Asian stock indices during the Asian crisis, and from four Latin American stock indices during the Mexican crisis, it finds evidence of changing dependence during periods of turmoil. Increased tail dependence and asymmetry characterize the Asian countries, while symmetry and tail independence describe the Latin American case. Structural breaks in tail dependence are a dimension of the contagion phenomenon. Therefore, the rejection of the correlation breakdown hypothesis should not be considered, without further investigation, as evidence of a stable dependence structure.
This paper uses seemingly unrelated probit techniques to separate the transmission of a crisis due to broadly defined macroeconomic interdependence from contagion due to herding, avoiding some of the caveats of the more traditional cross-correlation approach. We find that pure contagion occurred in a limited number of country pairs generally belonging to the same region. A reduction in speculative pressure can also be identified between countries in different regional blocks. This seems to suggest that after an initial crisis episode, investors tend to discriminate on the basis of location and common macroeconomic weakness or perceived similarity.
This paper considers a simple distribution-free test for nonnested model selection. The new test is shown to be asymptotically
more efficient than the well-known Vuong test when the distribution of individual log-likelihood ratios is highly peaked.
Monte Carlo results demonstrate that for many applied research situations, this distribution is indeed highly peaked. The
simulation further demonstrates that the proposed test has greater power than the Vuong test under these conditions. The substantive
application addresses the effect of domestic political institutions on foreign policy decision making. Do domestic institutions
have effects because they hold political leaders accountable, or do they simply promote political norms that shape elite bargaining
behavior? The results indicate that the latter model has greater explanatory power.
This paper investigates whether macroeconomic variables can predict recessions in the stock market, i.e., bear markets. Series such as interest rate spreads, inflation rates, money stocks, aggregate output, unemployment rates, federal funds rates, federal government debt, and nominal exchange rates are evaluated. After using parametric and nonparametric approaches to identify recession periods in the stock market, we consider both in-sample and out-of-sample tests of the variables' predictive ability. Empirical evidence from monthly data on the Standard & Poor's S&P 500 price index suggests that among the macroeconomic variables we have evaluated, yield curve spreads and inflation rates are the most useful predictors of recessions in the US stock market, according to both in-sample and out-of-sample forecasting performance. Moreover, comparing the bear market prediction to the stock return predictability has shown that it is easier to predict bear markets using macroeconomic variables.
This article investigates why, in October 1987, almost all stock markets fell together despite widely differing economic circumstances.
We construct a model in which “contagion” between markets occurs as a result of attempts by rational agents to infer information
from price changes in other markets. This provides a channel through which a “mistake” in one market can be transmitted to
other markets. We offer supporting evidence for contagion effects using two different sources of data.
This article proposes a new approach to evaluate contagion in financial markets. Our measure of contagion captures the coincidence
of extreme return shocks across countries within a region and across regions. We characterize the extent of contagion, its
economic significance, and its determinants using a multinomial logistic regression model. Applying our approach to daily
returns of emerging markets during the 1990s, we find that contagion is predictable and depends on regional interest rates,
exchange rate changes, and conditional stock return volatility. Evidence that contagion is stronger for extreme negative returns
than for extreme positive returns is mixed.
An empirical model of multiple asset classes across countries is formulated in a latent factor framework. A special feature of the model is that financial market linkages during periods of financial crises, including spillover and contagion effects, are formally specified. The model also captures a range of common factors including global shocks, country and market shocks, and idiosyncratic shocks. The framework is applied to modelling linkages between currency and equity markets during the East Asian financial crisis of 1997-98. The results provide strong evidence that cross-market links are important. Spillovers have a relatively larger effect on volatility than contagion, but both are statistically significant. Copyright © 2007 John Wiley & Sons, Ltd.
This paper presents a new empirical approach to address the problem of trading time differences between markets in studies of financial contagion. In contrast to end-of-business-day data common to most contagion studies, we employ price observations, which are exactly aligned in time to correct for time-zone and end-of-business-day differences between markets. Additionally, we allow for time lags between price observations in order to test the assumption that the shock is not immediately transmitted from one market to the other. Our analysis of the financial turmoil surrounding the Asian crisis reveals that such corrections have an important bearing on the evidence for contagion, independent of the methodology employed. Using a correlation-based test, we find more contagion the faster we assume the shock to be transmitted. Copyright (c) Blackwell Publishing Ltd and the Department of Economics, University of Oxford, 2008.
This paper presents a theoretical framework to highlight possible channels for the international transmission of financial shocks. We first review the different definitions and measures of contagion adopted by the literature. We then use a simple multi-country asset pricing model to classify the main elements of the current debate on contagion and provide a stylized account of how a crisis in one country can spread to the world economy. In particular, the model shows how crises can be transmitted across countries, without assuming ad hoc portfolio management rules or market imperfections. Finally, tracking our classification, we survey the results of the empirical literature on contagion. Copyright Blackwell Publishing Ltd, 2003.
Matching university places to students is not as clear cut or as straightforward as it ought to be. By investigating the matching algorithm used by the German central clearinghouse for university admissions in medicine and related subjects, we show that a procedure designed to give an advantage to students with excellent school grades actually harms them. The reason is that the three-step process employed by the clearinghouse is a complicated mechanism in which many students fail to grasp the strategic aspects involved. The mechanism is based on quotas and consists of three procedures that are administered sequentially, one for each quota. Using the complete data set of the central clearinghouse, we show that the matching can be improved for around 20% of the excellent students while making a relatively small percentage of all other students worse off.
The paper surveys a broad array of data to compare the scope and impact of three emerging market financial crises: the debt crisis of the 1980s, the Mexican financial crisis of 1994-95, and the current international financial crisis. While certain conventional views regarding the three episodes are supported by the data examined in this paper, we find that in several respects, the current crisis is more similar to prior emerging market crisis episodes than is commonly believed.
We study the correlation of monthly excess returns for seven major countries over the period 1960-90. We find that the international covariance and correlation matrices are unstable over time. A multivariate GARCH(1,1) model with constant conditional correlation helps to capture some of the evolution in the conditional covariance structure. However tests of specific deviations lead to a rejection of the hypothesis of a constant conditional correlation. An explicit modelling of the conditional correlation indicates an increase of the international correlation between markets over the past thirty years. We also find that the correlation rises in periods of high volatility. There is some preliminary evidence that economic variables such as the dividend yield and interest rates contain information about future volatility and correlation that is not contained in past returns alone.
Heteroskedasticity biases tests for contagion based on correlation coefficients. When contagion is defined as a significant increase in market comovement after a shock to one country, previous work suggests contagion occurred during recent crises. This paper shows that correlation coefficients are conditional on market volatility. Under certain assumptions, it is possible to adjust for this bias. Using this adjustment, there was virtually no increase in unconditional correlation coefficients (i.e., no contagion) during the 1997 Asian crisis, 1994 Mexican devaluation, and 1987 U.S. market crash. There is a high level of market comovement in all periods, however, which we call interdependence. Copyright The American Finance Association 2002.
The paper investigates the common dynamic properties of business cycle fluctuations across countries, regions, and the world. We employ a Bayesian dynamic latent factor model to estimate common components in macroeconomic aggregates (output, consumption and investment) in a sixty-country sample covering seven regions of the world. The results indicate that a common world factor is an important source of volatility for aggregates in most countries, providing evidence for a world business cycle. We find that region-specific factors play only a minor role in explaining fluctuations in economic activity. We also document similarities and differences across regions, countries and aggregates. (JEL F41, E32, C11, C32) Is there a world business cycle? Recent studies have indeed provided evidence that there are many cross-country links in macroeconomic fluctuations.
: Financial market observers have noted that during periods of high market volatility, correlations between asset prices can differ substantially from those seen in quieter markets. For example, correlations among yield spreads were substantially higher during the fall of 1998 than in earlier or later periods. Such differences in correlations have been attributed either to structural breaks in the underlying distribution of returns or to "contagion" across markets that occurs only during periods of market turbulence. However, we argue that the differences may reflect nothing more than time-varying sampling volatility. As noted by Boyer, Gibson, and Loretan (1999), increases in the volatility of returns are generally accompanied by an increase in sampling correlations even when the true correlations are constant. We show that this result is not just of theoretical interest: When we consider quarterly measures of volatility and correlation for three pairs of asset returns, we find that t...
: The paper investigates the common dynamic properties of business cycle fluctuations across countries, regions and the world. We employ a Bayesian dynamic latent factor model to estimate common components in main macroeconomic aggregates (output, consumption and investment) in a sixty-country sample covering seven regions of the world. In particular, we simultaneously estimate (i) a dynamic factor common to all aggregates/regions/countries (the world factor); (ii) a set of 7 regional dynamic factors common across aggregates within a region; (iii) 60 country factors to capture dynamic comovement across aggregates within each country; (iv) and a component for each aggregate that captures idiosyncratic dynamics. We decompose the volatility in each aggregate into the fraction due to the world, region, country, and idiosyncratic components. The results indicate that the world factor is an important source of volatility for aggregates in most countries, providing evidence for a world busine...
Acurracy Economic and Statistical Measures of Forecast 26 rHamao Correlations in Price Changes and Volatility Across International Stock Markets
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What triggers market jitters?
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Evaluating correlation breakdowns during periods of market volatility. In: International Financial Markets and the Implications for Monetary and Financial Stability
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