Abstract
Based on the cyclical movements of the Athens Stock Market, the paper empirically examines the behavior of seven sectors (markets) namely: industry-services, emporium, construction, petroleum, telecommunications, food-beverages, and banks. Specifically using daily observations from January 2006 to August 2017, we estimate a dynamic equicorrelation multivariate GARCH model (DECO-MGARCH) developed by Engle and Kelly (2012), to analyze the dynamic behavior of these sectors. Furthermore, using time-dependent entropic measures we examine empirically the uncertainty (expectations) regarding the correlation behavior of these seven sectors. The empirical results are in line with previous findings (Tsai & Chen, 2010; Garnaut, 1998) and provide evidence supporting the view of high correlations during periods of crises. In addition, the dynamic entropy shows that the expectations of market participants were more concentrated (less spread out) during these periods of crises. Therefore, the empirical evidence of the paper supports the view that market participants share the same opinions (entropy exhibits low uncertainty) during crises and therefore are acting in a similar fashion (exhibiting high correlation).
Highlights
The issue of correlation between different stock market sectors, between different stocks, or between stock markets of different regions has been thoroughly researched
The assertion that correlation increases during times of high market volatility are very well documented in the literature (Karolyi & Stulz, 1996; Ramchand & Susmel, 1998; Longin & Solnik, 2001; etc.)
Kearney and Poti (2005) examined correlation dynamics using daily data from 1993 to 2002 on the five largest Eurozone stock market indices. They estimated conditional correlations using the symmetric and asymmetric dynamic conditional correlation multivariate GARCH (DCC-MGARCH) model and their results suggested that there are very small benefits to be gained in diversifying across Eurozone market indices, there were significant gains to be exploited in diversifying across different stocks
Summary
The issue of correlation between different stock market sectors, between different stocks, or between stock markets of different regions has been thoroughly researched. Return correlations do not remain constant over time They tend to decline in bull markets and to rise in bear markets (De Santis & Gerard, 1997; Ang & Bekaert, 1999; Longin & Solnik, 2001). We estimate a dynamic equicorrelation multivariate GARCH model (DECO-MGARCH) to analyze the dynamic behavior of seven Athens Stock Exchange sectors (markets) using daily observations from January 2006 to August 2017. We used time-dependent entropic measures to empirically examine the uncertainty (expectations) regarding the correlation behavior of these seven sectors.
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