Abstract
This paper focuses on four major aggregate stock price indexes (SP 500, Stock Europe 600, Nikkei 225, Shanghai Composite) and two “safe-haven” assets (Gold, Swiss Franc), and explores their return co-movements during the last two decades. Significant contagion effects on stock markets are documented during almost all financial crises; moreover, in line with the recent literature, the defensive role of gold and the Swiss Franc in asset portfolios is highlighted. Focusing on a new set of macroeconomic and financial series, a significant impact of these variables on stock returns correlations is found, notably in the case of the world equity risk premium. Finally, long-run risks are detected in all asset portfolios including the Chinese stock market index. Overall, this empirical evidence is of interest for researchers, financial risk managers and policy makers.
Highlights
A large body of empirical literature documents the time-varying nature of asset returns co-movements.Focusing on stock returns, this literature relies on various econometric techniques ranging from wavelet correlation analysis (Dajcman et al 2012), to a quantile regression approach (Ciner et al 2013) and, more extensively, to alternative specifications of Engle’s (2002)dynamic conditional correlation (DCC) model
A major limitation of the literature exploring the effects of financial crises is the absence of a comprehensive approach as regards stock market indexes and the set of crises included in the empirical investigation
The empirical investigation relies on a standard regression approach with crisis dummies (see, e.g., Syllignakis and Kouretas (2011) and Cai et al (2016) as regards bilateral stock returns correlation; see, e.g., Chkili (2016) and Kang et al (2016) as regards correlations between stocks and “safe-haven” asset returns)
Summary
A large body of empirical literature documents the time-varying nature of asset returns co-movements. The use of the Sovereign CDS spread, the TED spread and the VIX volatility index is quite common in subsequent work focusing on dynamic correlations between emerging economies and US stock market returns (Hwang et al 2013; Cai et al 2016) While this variable selection approach is more inclusive, other important financial variables, such as the world equity risk premium or the European Central Bank (ECB) systemic stress composite indicator, have been neglected in the literature. 2019), the role of consumer confidence or economic policy uncertainty indicators has never been explored, to the best of my knowledge These indicators could potentially have a strong impact on dynamic returns co-movements on international stock markets. Descriptive Statistics and Parameters Estimates from Engle (2002) DCC Model
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