Increase In Comovement Research Articles

Co-movement between commodity and equity markets revisited—An application of the Thick Pen method

This paper analyses interdependence between the returns of specific energy and non-energy commodities and equities using (i) Thick Pen Measure of Association (TPMA) and (ii) Multi-Thickness Thick Pen Measure of Association (MTTPMA). We capture time-varying co-movement and co-movement across different time scales to analyse the short-term and long-term features of the time series using stationary data. Energy index futures show an increase in co-movement with equities since the start of the financialisation period. There are asymmetric effects in cross-scale co-movement between various commodities and equities. Weak co-movement between equity and specific commodity futures indicates diversification benefits for short-term and long-term investors.

Impacts of COVID-19 on dynamic return and volatility spillovers between rare earth metals and renewable energy stock markets

We examine the time-frequency co-movements and return and volatility spillovers between the rare earths and six major renewable energy stocks. We employ the wavelet analysis and the spillover index methodology from January 1, 2018 to May 15, 2020. We report that the COVID-19-triggered significant increase in co-movements and spillovers in returns and volatility between the rare earths and renewable energy returns and volatility. The rare earths act as net recipient of both return and volatility spillovers, while the clean energy stocks are net transmitters of return and volatility spillovers before and during the COVID-19 crisis. The solar and wind stocks are net transmitters/receivers of spillovers before/during the pandemic. The remaining markets shift from net spillover receivers to transmitters or vice versa; evidencing the effects of the pandemic. Our results show that cross-market hedge strategies may have their efficiency impaired during the periods of crises implying a necessity of portfolio rebalancing.

Cryptocurrency comovements and crypto exchange movement: The relocation of Binance

Binance, the largest cryptocurrency exchange by traded value, relocated from Hong Kong (origin market) to Malta (destination market). This study exploits this relocation event by examining the comovement of Binance's native token with the native tokens of other cryptocurrency exchanges in the origin and destination markets. Using multivariate regression analysis, our results show that Binance experienced a significant decline in comovement with its origin market after moving to Malta. The results are less evident for the destination market; however, an increase in comovement immediately after the relocation of Binance is notable.

Do ETFs affect the return co-movement of their underlying assets? Evidence from an emerging market

Purpose The objective of the present study is to examine how domestic and foreign exchange traded funds (ETFs) tracking Indian equities affect the return correlations of their underlying constituents. Further, this study investigates how these effects vary between periods of turmoil and calmness in the financial markets.Design/methodology/approach The study is based on quarterly data for stocks comprising the CNX (CRISIL NSE Indices) Nifty 50 Index from 2009Q1 to 2019Q4. The data on holdings of 45 domestic and 196 foreign ETFs in the sample stocks were obtained from Thomson Reuters’ Eikon. The paper employs a panel-regression methodology with stock and time fixed effects and robust standard errors.Findings This study documents that irrespective of the market conditions, foreign ETFs, particularly those from Asia–Pacific and European regions tend to exacerbate co-movement. Conversely, domestic ETFs lower co-movement in stable markets but during periods of turbulence a jump in return correlations is observed.Practical implications The results have important implications for ETF investors as well as market regulators because an increase in co-movement would reduce the diversification benefits of ETFs, thereby nullifying the biggest advantage that ETFs have to offer.Originality/valueThe literature on the economic impact of ETFs is highly skewed with the majority of the studies focusing on developed markets. To the best of the authors’ knowledge, this study is the first one to empirically examine the impact of ETFs on the return co-movement of an emerging market. Furthermore, the study is unique as the authors investigate how the effects of ETFs vary in turbulent and tranquil markets.

Administrative division adjustments and stock price comovement: Evidence from the city–county mergers in China

Under the background of Chinese market segmentation, whether government-led administrative division adjustments can promote regional economic integration is a practical issue. Taking interregional firms’ stock price comovement as a micro measurement of regional integration, this paper investigates the regional integration effect of administrative division adjustments, i.e., city–county mergers. We find that stock price comovement between county-level and municipal district-level firms in the merged counties and municipal districts significantly improve after city–county mergers, particularly in regions with a higher degree of market segmentation and lower degree of marketization. We further find that the increase in stock price comovement caused by city–county mergers emerges from the increase in comovement of real activities between firms in the merged counties and municipal districts. Taken together, our results suggest that government-led administrative division adjustments effectively promote regional integration.

Synchronization without similarity. The effects of COVID-19 pandemic on GDP growth and inflation in the Eurozone

ABSTRACT As the European Central Bank implements a common monetary policy for all member states, the effectiveness of the policy hinges upon the synchronization and similarity of inflation and GDP growth between them. We examine the consequences of COVID-19 outbreak for GDP growth and inflation of the Eurozone countries. We find that business cycles have been diverging since the aftermath of the Financial Crisis; however, the outbreak of COVID-19 brought about synchronization on a record scale. However, this increase in comovement is accompanied by an increase in the dissimilarity in the rates of GDP growth. Ergo, synchronization without similarity.

From banking integration to housing market integration - Evidence from the comovement of U.S. Metropolitan House Prices

We find that the movement of urban house prices in the U.S. has become more synchronized since the early 2000s. The elevated comovement is substantial, widespread, occurring for the majority of city-pairs, and continued even after the housing market turned to bust in 2007. We investigate whether and to what extent the comovement increase can be explained by banking integration following deregulations in the banking industry. Utilizing novel measures of city-level banking integration based on bank deposit data, we find that an increase in banking integration leads to an increase in the comovement of urban house prices. City-pairs that are more connected through national banking system had experienced a greater increase in comovement, after controlling for a variety of explanatory variables. Our findings can be interpreted as spillover effect, rather than substitution effect, of banking integration at work.

Co-Movement between Commodity and Equity Markets Revisited - an Application of the Thick Pen Method

This paper analyses interdependence between the returns of a number of energy and non-energy commodities on the one hand and equities on the other based on Thick Pen Transform (TPT) methods: (i) Thick Pen Measure of Association (TPMA) and (ii) Multi- Thickness Thick Pen Measure of Association (MTTPMA). These metrics can be used to capture time-varying co-movement and co-movement across different time scales: this facilitates the analysis of the short-term and long-term features of the time series using both stationary/non-stationary data. Among our key findings is that, when considering longterm co-movement, energy index futures show an increase in co-movement with equities since the beginning of the financialisation period. There are asymmetric effects in cross-scale comovement between various commodities and equities. The weak co-movement between equity and off-index futures, livestock and soybean-based commodities indicates diversification benefits for both short-term and long-term investors.

Synchronization Without Similarity. The Effects of Covid-19 Pandemic on GDP Growth and Inflation in the Eurozone

As the European Central Bank implements a common monetary policy for all member states, the effectiveness of the policy hinges upon the synchronization and similarity of inflation and GDP growth between them. We examine the consequences of COVID-19 outbreak for GDP growth and inflation of the Eurozone countries. We find that business cycles had been diverging since the aftermath of the Financial Crisis; however, the outbreak of COVID-19 brought about synchronization on a record scale. However, this increase in comovement is accompanied by an increase in the dissimilarity in the rates of GDP growth. Ergo, synchronization without similarity.

Aggregation of Idiosyncratic Shocks in the Customer-Supplier Network

Using customer-supplier networks, we document a strong increase in stock return comovement between customer and supplier after the establishment of their relationship. This increase in comovement is mainly associated with cash flow news and firm-specific information. We find that the idiosyncratic shocks to customers diffuse through the customer-supplier network and aggregate into a systematic risk, which affects suppliers' expected returns. Using a long-short portfolio based on exposure to aggregated customer risk, we realize annual excess returns of 3.1% (value-weighted) and 6.11% (equal-weighted), respectively. The customer risk factor cannot be explained by market, size, book-to-market, or momentum factor. Consistently, we also find a positive relationship between exposure to the customer risk factor and cost of equity capital.

Contagion versus Interdependence Across Regional U.S. Housing Markets and Implications for RMBS Geographic Diversification Strategy

Executive Summary Home prices in the United States often exhibit little (and sometimes even negative) correlation across different regions. This reflects segmentation in the national housing market and also provides an apparent opportunity for investors to diversify their exposure to regional downturns by creating residential mortgage-backed securities (RMBSs) out of geographically dispersed home loans. Unfortunately, in a crisis, correlations may rise, and the benefits from geographical diversification may disappear just when investors most desire them. Using a flexible generalized autoregressive conditional heteroscedasticity (GARCH) technique, I find that regional correlations indeed rose dramatically during the latest downturn, in some cases to unprecedented levels. Moreover, this increase in co-movement was clearly financial contagion, and not merely interdependence. Investors in mortgage-backed and other housing securities should thus not rely on house price correlations calculated during “normal” t...

Do Investors Use the Olympics as a Category for Investment and Should They?

We investigate whether media coverage of mega-sports events can have spill-over effects in the stock market. Specifically, we focus on the Olympics and we analyze whether the media attention and hype surrounding the Olympics encourages investors to use the Olympics as a way to classify stocks for investment. We examine two Olympic hosting countries: China (2008) and the UK (2012) and identify stocks that media outlets list as either directly or indirectly involved in the Olympics (Olympic stocks). These stocks come from a broad range of industries and vary considerably in the level and timing of their involvement in the Olympics. We find that in both countries, Olympic stocks exhibit increases in comovement of returns after the announcement of the winning bid and declines in comovements after the games are played. However, Olympic stocks do not have superior financial performance and their fundamentals (earnings and cash flows) do not exhibit strong co-movement over the Olympic time period. This evidence suggests that the changes in return comovement are not driven by underlying fundamentals. Our evidence instead suggests that the combination of media attention and a mega-sports event can lead to transitory and sentiment-driven stock categorization.

The risk spiral: The effects of bank capital and diversification on risk taking

We present a model where bank assets are a portfolio of risky debt claims and analyze stockholders' risk-taking behavior while considering the strategic interaction between debtors and creditors. We find that: (1) as the leverage of a bank increases, risk shifting by borrowers increases, even if their leverage is unchanged (zombie lending). (2) While the literature demonstrates that an increase in the comovement of a loan portfolio increases the bank's cost of default directly, we find that the increase in comovement causes an increase in risk shifting that further increases the cost of default (3) Risk shifting decreases with the diversification of a loan portfolio.

High frequency trading and comovement in financial markets

Using the staggered entry of Chi-X in 12 European equity markets as a source of exogenous variation in high frequency trading (HFT), we find that HFT causes significant increases in comovement in returns and in liquidity. About one-third of the increase in return comovement is due to faster diffusion of market-wide information. We attribute the remaining two-thirds to correlated trading strategies of HFTs. The increase in liquidity comovement is consistent with HFT liquidity providers being better able to monitor other stocks and adjust their liquidity provision accordingly. Our findings suggest a channel by which HFT impacts the cost of capital.

Regional Convergence and Structural Change in US Housing Markets

If house prices are convergent at the national level, monetary policy is easier to implement and labor has an easier time achieving mobility across regions. There have accordingly been a number of studies on home price convergence. Some of these previous papers have methodological problems. In this paper we examine home price convergence across the different regions of the US using Pesaran’s pairwise approach. This method obviates some of the methodological issues which have plagued previous studies. We also test with a method that allows for structural breaks in the relationships between regional markets. We find, first, that overall the US housing market is not convergent across regions. We find some evidence that the high-priced regions of New England and the Pacific exhibit convergence. Analysis of structural change reveals that some of the increase in co-movement between these expensive markets, and the decrease in co-movement between these and other markets accelerated in the early-to-mid 1980s. Other papers on income convergence have shown the 1980s to be a time when convergence in output in the US began to slow. Moreover, the early 1980s were a period of major change in US housing finance, as securitization made credit available from new sources, rather than just depository institutions. This greater credit, including from global sources, appears to have played a role in creating divergent prices in regions which likely have differing elasticities of housing supply.

Regional convergence and structural change in US housing markets

ABSTRACTIf house prices are convergent at the national level, monetary policy is easier to implement, and labour has an easier time achieving mobility across regions. Accordingly there have been several studies on home price convergence. Some of these previous papers have methodological problems. This paper examines home price convergence across the different regions of the United States using Pesaran’s pairwise approach. This method obviates some of the methodological issues that have plagued previous studies. It also tests with a method that allows for structural breaks in the relationships between regional markets. Overall, it is found that the US housing market is not convergent across regions. Some evidence is found that the high-priced regions of New England and the Pacific exhibit convergence. Analysis of structural change reveals that some of the increase in co-movement between these expensive markets, and the decrease in co-movement between these and other markets, accelerated in the early to mid-1980s. The early 1980s saw major changes in US housing. Financialization, in the form of a greater role for non-depository investors such as real estate investment trusts (REITs), a big take-off in securitization, falling interest rates and more capital from abroad led to greater commodification of housing in terms of movement away from housing’s role as shelter and towards the exchange value of homes. These changes made credit available from new sources. This greater credit, including from global sources, appears to have played a role in creating divergent prices in regions that likely have differing elasticities of housing supply.

Spillovers, integration and causality in LME non-ferrous metal markets

We examine the interrelationships in the global base metal markets over a 22 year period 1994–2016 using a variety of econometric methods. The results demonstrate the high intensity of both return and volatility spillovers across the selected markets. Furthermore, the degree of co-movements varies among time and frequencies. The study also contributes to the contagion literature since the results revealed the increase in co-movements after the financial crisis. Aluminium is found to be the driving force, with significant influence across all methodologies. The findings show that the behaviour of the non-ferrous metals is similar to other conventional asset classes, like equities and bonds, justifying the position that metals have become an investment class.

Information Networks and Market Segmentation

I examine how non-uniform information diffusion through distinct networks segments U.S. financial markets. Using changes in newspaper ownership networks, I document that a network link between different geographic areas leads to increased comovement of turnover and returns between stocks headquartered in those areas. Consistent with delayed content sharing within a network, the largest increase in comovement is observed using weekly data. I show that the network-driven comovement is not driven by fundamentals and is weaker for large firms with high institutional ownership and declines in the post-internet era. I also document that a network link causes price levels of linked stocks to become more similar. My findings show that segmented information networks lead to segmented financial markets with implications for market efficiency, home bias, and the effects of changes in the U.S. media landscape on financial markets.

Connectivity in Global Stock Markets during Financial Crisis

본 연구는 금융 위기 발생 시 대륙간의 금융시장이 어떻게 연결되어 반응하는지를 보이고자 한다. 이를 위해 주식 가격의 움직임과 인과 관계를 분석한다. 각 대륙 주식의 price-earnings 비율의 움직임 분석을 통해 금융 위기 기간 동안의 증대된 동일 방향으로의 움짐임이 존재한다는 것을 검증한다. 또한, 시계열 데이터를 단위근 시계열, 공적분, 벡터 자기회귀 (VAR) 모델, 임펄스 응답, 예측 오차 분산 분해 및 Granger 인과 관계의 방법을 사용하여 분석한다. 그 결과 금융 위기가 발생했을 때 대륙간 주식의 price-earnings비율에 대한 Granger 인과성이 증가하는 것을 관찰할 수 있다. 또한 마지막으로 금융 위기 동안 충격의 대륙간 이동 경로를 확인할 수 있다. 이러한 분석들이 국제 위기의 위험을 통제하고 국가 및 개인 투자자가 효과적인 투자 전략을 고안하는 데 도움이 될 것으로 기대한다.This study analyzes the co-movement and causality of continental and intercontinental stock prices during the times of financial crisis. The co-movement of stock price-earnings ratios in each continent is analyzed and significant increase in co-movement during the times of financial crisis is verified. In addition, time-series data are analyzed by the following methods: unit root time series, co-integration, vector autoregressive (VAR) model, impulse response, forecast error variance decomposition, and Granger causality. The results show a significant increase in Granger causality of intercontinental price-earnings ratios during the times of financial crisis. An intercontinental path of impulse transfer is also identified during financial crises. These analyses can assist in controlling the risks of the international crises and help investors design effective investment strategies.

Equivalent volume and comovement

We introduce a new indicator of relative liquidity, equivalent volume (EV), based on the amount of a stock traded indirectly through its inclusion in ETFs. We hypothesize that the EV of an ETF component stock is related to its comovement with other component stocks through the relative liquidity channel under trading caused by arbitrage. Using daily ETF holdings and several comovement estimators, we find that a one-unit increase in daily equivalent volume is associated with increase in comovement ranging from 1.1% to 27.6%. Our findings contribute to the literature on trading volume, liquidity and comovement by relating arbitrage-induced trading pressure to the underlying stock comovement.