Dynamic of the States of Three Different Stock Markets from Correlation and Partial Correlation Changes

Abstract

The core focus of the study is to examine financial states using index effect on stock to stock correlations of developed, developing and emerging market. The three markets such as S&P 500, KOSPI 200 and DSE are declared as developed, developing and emerging market respectively. To study the similarity between stock price changes, we calculate the time series of the daily log return. Closing stock prices of the targeted markets have been used to measure the daily return of the stocks. To analyze the market mobility, Pearson correlation coefficient, partial correlation, and index effect on stock to stock correlation techniques have been applied. The study found that the companies of developed and emerging market are more strongly correlated than those of developing market during big crash. On the other hand, developing market shows less index effect on stock correlations during crisis. Moreover, insignificant index effect has been found in emerging market during calm state. No significant effect of DSE index on stock to stock correlations in the period of global financial crisis has been observed, implying that global financial crisis did not hit to the DSE in this period. Before the market crash, the interactions between stocks became low enough which corresponds to lower value of average correlation for all types of market. Finally, the change of correlation and partial correlation can be a good indicator to identify and predict the financial states of all the markets which will further helps the stakeholders to make proper economic decisions.