Changes In Comovement Research Articles

Contagion and linkages across international currencies

This paper examines dynamic linkages among international currencies in the face of several turmoil episodes including the global financial crisis (GFC), eurozone sovereign debt crisis (ESDC) and the recent COVID-19 pandemic. We utilize weekly data from August 2005 till December 2022. Our empirical strategy consists of identification of crisis periods using a Markov-switching VAR, followed by estimation of the dynamic conditional correlations using an ADCC-GARCH model and testing for the impact of the crises using a regression model with robust standard errors. We compare impact of the episodes on the dynamic correlations across the currency pairs. Our findings suggest that correlation between developed economy exchange rates increased significantly during these episodes implying existence of a contagion effect. While significant negative correlation coefficients were observed across all pairs with Japanese Yen during GFC and ESDC, indicating flight to quality. We analyse factors that may be responsible for changes in co-movement of the currencies during the study period and find that financial stress, emergence of the pandemic and geo-political risk have a significant role to play.

Co-Movements between an Asian Technology Stock Index and Cryptocurrencies during the COVID-19 Pandemic: A Bi-Wavelet Approach

This study investigates the co-movement patterns of Asia technology stock indices and cryptocurrencies during the COVID-19 pandemic. The analysis examines Bitcoin and Ethereum, China’s Tech index (XA90), and India’s Tech index (NSEIT) from 2017 to 2021, representing both before and during COVID-19. To visually explore the co-movement between these variables, a bi-wavelet method is employed. This approach allows for an examination of how these variables move together over time coherently. There were noticeable changes in the co-movement patterns between technology stock indices and cryptocurrencies during COVID-19 compared to before the pandemic. The duration of co-movements decreased significantly after the emergence of COVID-19. The previous financial crisis had a longer time horizon for joint movement, lasting 256 days. However, during the pre-COVID-19 period, XA90 exhibited a strong co-movement with Bitcoin over this extended period but weakened afterward when COVID-19 emerged. Conversely, NSEIT showed a significant co-movement with both Ethereum and Bitcoin in the initial stages of the pandemic. Before that period, NSEIT had muted price movements along with BTC. These changes in price co-movements suggest shifts in herding behavior due to the pandemic. Notably, cryptocurrency markets have demonstrated faster recovery compared to technology stock markets.

COVID-19’s Impact on Global Stock Market Movements and an Examination on Turkish Market

Finansal küreselleşme, 1980’li yıllarda gelişmiş ülkelerde ve 1990’lı yıllarda gelişmekte olan ülkelerde ortaya çıkan sermaye hareket serbestlikleri ile birlikte önemli bir aşamaya geçmiştir. Bu aşamada sistemik risk unsurları artmış, olumsuz gelişme ve beklentiler tüm piyasalara hızla yayılarak etki edebilir hale gelmiştir. Hisse senedi piyasaları özelinde bakıldığında çok sayıda ülke piyasasının “küresel” piyasaya hızlı bir şekilde entegre olduğu görülmüş ancak söz konusu entegrasyonun düzeyi, tüm ülke piyasalarının güçlü bir şekilde birlikte hareket edecekleri seviyelere ulaşmamıştır. Yaşanan krizler karşısında kısa dönemde benzer reaksiyonlar gözleniyor olsa da şoklar sonrası hareketlilikler önemli farklılıklar gösterebilmektedir. Bu çerçevede, COVID-19 hastalığının Dünya Sağlık Örgütü tarafından 11 Mart 2020 tarihinde küresel ölçekte salgın ilan edilmesi ile hisse senedi piyasalarının birlikte hareketlerinde bir değişim olup olmadığı, olduysa değişimin ne şekilde olduğu temel bileşenler analizi ve değişim noktası analizi ile araştırılmıştır. Analizde 31.12.2020 tarihine kadar gerçekleşen günlük endeks hareketleri kullanılmıştır ve Türkiye ile birlikte 20 ülke piyasası dâhil edilmiştir. Ayrıca Türkiye hisse senedi piyasasının, ülkede salgının seyrine ilişkin açıklanan sayı ve kısıtlamalardan ne düzeyde etkilendiği de incelenmiştir.

Time of COVID-19: stability analysis of stocks, exchange rates, minerals and metals markets

The coronavirus (COVID-19) pandemic has shaken the global economy and significantly affected the financial markets. This anxiety triggered panic reactions. The article aims to explain impact of abrupt changes in structural stability of four key asset markets due to pandemic. It includes a detail discussion regarding structural change in co-movement of stock indices, exchange rates, minerals and metal returns. The daily returns of 14 financial indices across four groups during a span of 25 January 2019 to 3 February 2021 are sampled. The selection of financial assets is based on trading volume and velocity in each of the four groups. The results of Markov Switching model explain that pandemic not only increase volatility of financial markets but also have a significant long-term impact on structural behaviour in daily returns. The analysis further reveals differences in co-movement of financial returns during two periods. However, on a positive note, pandemic does make a way for few financial assets to dominate the market, especially ones recognised as ‘safe-haven’ assets.

Systematic Comovement in Threshold Group-Factor Models

We study regime-specific comovement between two large panels of variables that exhibit an approximate factor structure. Within each panel we identify threshold-type regimes through shifts in the factor loadings. For the resulting regimes, and with regard to the relation between any two variables in different panels, we define as systematic the comovement that is generated by the common components of the variables. In our setup, changes in comovement are identified by regime shifts in the loadings. After constructing measures of comovement between the two panels, we propose estimators for these measures and derive their asymptotic properties. We develop inferential procedures to formally test for changes in comovement between regimes. The empirical analysis of two large panels of U.S. and international equity returns shows that their comovement increases when U.S. macroeconomic uncertainty is sufficiently high.

Changes in co-movement and risk transmission between South Asian stock markets amidst the development of regional co-operation

This paper documents evidence of changes in the co-movement of stock returns and risk transmission among four South Asian stock markets over periods of regional market reform and global market instability. The sample period (1993–2015) is disaggregated into three sub-periods: before and after the establishment of the South Asian Federation of Exchanges (SAFE) and after the 2008 Global Financial Crisis. The principal components investigation and cointegration analysis conclude that the co-movement among stock returns in this region altered amidst a change in the institutional context and global economic uncertainty. Using a tetra-variate GARCH-BEKK model, we find that, after the establishment of SAFE, the interactions among the markets increased through volatility spillovers, but decreased through shock spillovers. In addition, there were more shock and volatility spillovers in the last sub-period as compared to the first two sub-periods, indicating that risk transmission across countries increased during the period of uncertainty. In particular, the Indian stock market was a risk spreader in South Asia after the setup of SAFE and its influence on the regional stock markets increased even further after the 2008 Global Financial Crisis.

Credit Rating and Stock Return Comovement

Firms with similar credit ratings, especially junk-rated ones, tend to comove strongly in stock returns with each other, which is not fully explained by their exposures to systematic factors. Following a firm’s downgrade into the junk-grade group, it tends to comove much more strongly in stock returns with firms in the junk-grade group and less with those in the investment-grade group. There is no similar trend in comovement with either credit rating group in the one-year window prior to the downgrade, indicating that changes in comovement are unlikely driven by changes in fundamentals of affected firms. Finally, we find evidence consistent with the investor clientele effect explanation for excessive comovement related to credit ratings by examining a) how mutual funds with different credit preferences adjust their stock holdings of firms being downgraded into junk-grade ratings and b) how flows to mutual funds that tend to invest in junk-rated firms affect these firms’ stock returns and their comovement.

Estimation of the co-movements between biofuel production and food prices: A wavelet-based analysis

Recently, the significance of biofuel production on food prices has become an important topic of discussion within the framework of sustainable development. Based on the relevant discussions, this work aims at observing the influence of biofuel production on food prices in the US for the monthly period 1981–2018 by considering all possible structural changes between the co-movements of the variables. In the analyses, oil prices and population variables are also employed as control variables. To this end, we use continuous wavelet model estimations for the whole sample period and sub-sample periods at different frequencies. All computations have considered the potential changes in co-movements of the variables at different sub-sample periods corresponding to high and low frequencies of observed time series data. Estimation results show that there exist significant relationships between biofuel production and food prices in the short-term and long-term cycles. The outcomes of the research hence may provide some insights into the design of sustainable energy and food policies in the United States.

The rise of passive investing and index-linked comovement

I introduce a general equilibrium model with active investors and indexers. Indexing causes market segmentation, and the degree of segmentation is a function of the relative wealth of indexers in the economy. Shocks to this relative wealth induce correlated shocks to discount rates of index stocks. The wealthier indexers are, the greater the resulting comovement is. I confirm empirically that S&P 500 stocks comove more with other index stocks and less with non-index stocks, and that changes in passive holdings of S&P 500 stocks predict changes in comovement of index stocks.

A GARCH Modelling of Volatility and M-GARCH Approach of Stock Market Linkages of North America

The present study attempts to capture the return volatility and the extent of dynamic conditional correlation between the stock markets of North America region. The data contain weekly stock market returns spanning from the second week of 1995 to the fourth week of June 2016. Using univariate ARCH and GARCH approaches, the study finds evidence of return volatility and its persistence within the region. Mexican stock market neither reacts intensely to immediate market fluctuations nor the part of the realized past volatility spill over to the current period, whereas the stock markets of Canada and USA experience high persistence of return volatility and Bermuda stock market returns are highly sensitive to the immediate market fluctuations. Using MGARCH-DCC, this article finds that emerging markets are less linked to the developed market in terms of return and that there also exists a weak co-movement between the stock markets. There is no evidence of market integration throughout the sample period. Correlations tend to spread out equally throughout the sample period, but the co-variances were found to be more volatile during 2008–2010. This article reveals that changes in co-movement are not due to a change in the correlations between markets but is simply due to volatility.

Monetary Policy, Stock Market and Sectoral Comovement

This paper evaluates the role that sectoral comovement plays in the propagation of monetary policy shocks on the stock market. In doing so, we introduce a factor-augmented vector autoregressive model with heterogeneous regime-switching factor loadings, denoted as MS2-FAVAR, that allows us to jointly assess (i) potential changes in the degree of comovement between each sector-specific stock return and the aggregate stock market as well as (ii) the propagation of monetary policy shocks taking into account such changes in comovement. We find that the efects of monetary policy shocks on stock returns are substantially amplied when industries experience a stronger degree of comovement, suggesting that a more interconnected stock market is more prone to the propagation of monetary policy shocks. The MS2-FAVAR model is also well-suited to perform a network analysis to characterize linkages in large datasets.

Strength of co-movement between sector CDS indexes and relationship with major economic and financial variables over time and during investment horizons

ABSTRACTThe main purpose of this article is to analyse the co-movement in both time and frequency between financial sector CDS indexes and between these indexes and their main economic and financial control variables for the period 2004–2014. Empirically, we implement the wavelet-squared coherence methodology to analyse the co-movement through time, frequency and power. Our results unveil that the co-movement between the three financial sectors’ CDSs changes through time and investment horizons, stressing the importance of hedging portfolios in real time. Also, we uncover that the changes in co-movement to relatively higher frequencies coincide with the inception of the recent global financial crisis. This result is collaborated with the co-movement between each CDS index and other global risk factors, including crude oil prices, interest rates and equity market volatility. Finally, we compare the wavelet coherence results with those of the DCC-FIAPARCH model and find that the two different approaches provide quite similar conditional correlations over time. Our results are important for investors, debtors, creditors and other decision-makers which are interested in CDS spread co-movements at different frequencies or investment horizons. It would be useful for all market participants to resort to an appropriate frequency domain to have better understanding of the sector CDS interrelationship behaviour in this domain.

Location and excess comovement

Firms that switch from NASDAQ to the NYSE between 1988 and 2000 show an increase in the comovement of their order flows with aggregate NYSE order flow, and a decline in comovement with NASDAQ order flow. These changes in comovement are coincident with the switch, large relative to firms that remain on NASDAQ and the NYSE, and not explained by the growth in indexing over the sample period, a possible selection bias inherent in the decision to switch to the NYSE or a delayed response to cross-market information. Cross-sectional analysis shows that large, institutionally owned, value-oriented and dividend paying firms experience greater changes in comovement following the move to the NYSE. Our evidence is consistent with an important role for style investing in generating excess comovement, as in Barberis and Shleifer (2003).

Time-Scale Analysis of Sovereign Bonds Market Co-Movement in the EU

We study the co-movement of the 10-year sovereign bond yields of 11 EU countries. Our analysis is focused mainly on changes in co-movement during the financial crisis period, especially around two significant dates - the fall of Lehman Brothers, September 15, 2008, and the announcement of the increase of Greece's public deficit on October 20, 2009. We study co-movement dynamics using wavelet analysis, which allows us to observe how co-movement changes across frequencies and over time. We divide the countries into three groups: the core of the Eurozone, the periphery of the Eurozone and the states outside the Eurozone. The results indicate that co-movement decreased considerably during the crisis period for all country pairs but that there are significant differences among the groups. Furthermore, we demonstrate that the co-movement of bond yields is frequency dependent.

Is There Really Excess Comovement? Causal Evidence from FTSE 100 Index Turnover

Stock returns appear to comove in excess of common news about stock fundamentals. I examine comovement when stocks are added to or deleted from the FTSE 100 stock index, which are events without news about fundamantals. Using a natural experiment created by FTSE’s index balancing rule, I find that random index turnover has no significant effect on comovement. Furthermore, non-random index turnover can introduce a selection bias that overstates the effect on comovement. Index turnover does not cause a change in comovement, but much rather it seems to be the reverse: a change in comovement can cause index turnover. My findings are consistent with the fundamentals-based hypothesis; rejections in the previous literature may be due to non-random index turnover.

Comovement and investment banking networks

We test the hypothesis that investment banking networks affect stock prices and trading behavior. Consistent with the notion that investment banks serve as information hubs for segmented groups of investors, the stock prices of firms that use the same lead underwriter during their equity offerings tend to move together. We also find that when firms switch underwriters between their initial public offering (IPO) and a seasoned equity offering (SEO), they comove less with the stocks associated with the old bank and more with the stocks associated with the new bank. This change in comovement is greater for stocks completing their first SEO and for those experiencing large changes in institutional ownership.

Is There an S&P 500 Index Effect?

We find that the firms included in the S&P 500 index are characterized by large increases in earnings, appreciation in market value and positive price momentum in the period preceding their index inclusion. This strong pre-inclusion performance predicts (1) the permanent increase of market value and (2) the change in return comovement, reflected in declines of size, value and momentum betas, following index inclusion. Non-event firms with similar performance experience similar appreciation in value and changes in comovement coincident with the event firms. Contrary to the consensus in the literature, our results indicate that – after accounting for the firms’ extraordinary pre-inclusion performance – index inclusion has no permanent effect on value and comovement.

Is World Stock Market Co-Movement Changing?

We examine world stock market comovement for 23 countries over 30-years from 1981 to 2010 -- a period that includes major changes in international trade institutions, capital market regulations, and the advent of the internet era. Our analysis is based on a generalized factor model that allows for country, regional, and world factors. We show that the commonly used world Fama French factor model with the world value-weighted portfolio as a proxy for the world factor, has biased results. We develop a new methodology, the Weighted-Generalized Canonical Correlation (W-GCC) method, to identify the presence of a world factor that explains variation in the stock price movements across all countries. We show in simulation studies that our methodology is able to identify the country factor even when the world factor is weak in some countries. We test for changes in comovement allowing for a structural change. We find that stock price comovements with respect to the world factor are stable through the mid 1990s and then starts increasing from the mid 1990s through 2010. The world factor we identify is highly correlated with the world factor estimated using an out-of-sample data set of ten newly emerged countries and comovement of these country returns also increase from 2000 to 2010. The Chinese B stock market shows a dramatic increase in comovement over the time period but not the Chinese A stock market, suggesting that comovement is more likely driven by investment cash flows. Our results have important implications for the benefits of international portfolio diversification strategies and the convergence of the cost of capital across countries.

The Nature of the Risk-Free Asset: Evidence from Credit Default Swaps

US sovereign debt is widely regarded as risk-free on nominal terms. However, between January 2008 and September 2010, US sovereign credit default swaps (CDS) traded at premium to a sample of US corporate CDSs. The implied default probabilities from CDS premiums show that the US government is more likely to default than these firms. We find no evidence that changes in fundamental default risk are responsible for this premium difference. Traditional explanations such as differences in recovery rates, counterparty risk and cheapest-to-deliver options also cannot explain it. Changes in comovement “factors” that represent spillover effects from the default risk of European countries, and liquidity, appear to drive the observed premium difference.

Comovement and Investment Banking Networks

We test the hypothesis that investment banking networks affect stock prices and trading behavior. Consistent with the notion that investment banks serve as information hubs for segmented groups of investors, the stock prices of firms that use the same lead underwriter during their equity offerings tend to move together. We also find that when firms switch underwriters between their initial public offering (IPO) and a seasoned equity offering (SEO), they comove less with the stocks associated with the old bank and more with the stocks associated with the new bank. This change in comovement is greater for stocks completing their first SEO and for those experiencing large changes in institutional ownership.