Increase In Comovement Research Articles

Has there actually been a sustained increase in the synchronization of house price (and business) cycles across countries?

Housing has been demonstrated to affect the macroeconomy, particularly business cycle fluctuations. Given the more globalized nature of financial and economic activity in comparison to past decades, there has been much research on how synchronized home values are across countries. This research mirrors a similar line of inquiry on business cycle movement across nations. The degree of co-movement has implications portfolio management in real estate investment, as well as for macroeconomic policy coordination across countries. In this paper, we apply a newly developed set of international house price data and utilize some recently created tools to investigate international housing and business cycle co-movement. We find that there has been no sustained increase in co-movement for either house prices or income across nations.

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 comovement of a loan portfolio increases the bank's cost of default directly, we find that the increase prevails through a second channel: an increase in risk shifting. (3) Risk shifting decreases with the diversification of a loan portfolio.

Has There Actually Been a Sustained Increase in the Synchronization of House Price (and Business) Cycles across Countries?

Results of recent research suggest an increase in co-movement in house prices across countries since the mid-1980s, and this apparent increased synchronization has been attributed to greater globalization in the form of rising trade and financial flows. A similar line of research has indicated an increase in overall business cycle synchronization across industrialized countries, again since the mid-1980s, and again pointed to increased globalization as the cause. If such results on increased co-movement of housing and business cycles were correct, they would have implications portfolio management in real estate investment, as well as for macroeconomic policy coordination across countries. However, the recent research, while highlighting an important topic, is based on a flawed methodology. In this paper, we apply a newly developed set of international house price data and utilize some recently created tools which overcome the methodological problems of the previous papers. We find, contrary to the existing literature, that there has been no sustained increase in co-movement for either house prices or income across nations. These results are in accord with the theory on globalization, which shows that greater trade of investment flows may easily lower, rather than raise co-movement of economic variables across national borders.

Systematic Liquidity and Leverage

Does trader leverage exacerbate the liquidity co-movement that we observe during crises? We exploit the threshold rules governing margin trading eligibility in India to identify a causal relationship between trader leverage and the extent to which a stock’s liquidity covaries with the liquidity of other stocks. We find that trader leverage causes sharp increases in comovement during severe market downturns. For our sample of stocks, the estimates suggest that the trader leverage channel explains about one third of the increase in liquidity commonality that we observe during crises. Consistent with downward price pressure due to the deleveraging of traders who rely on borrowing, we also find that leverage causes stocks to exhibit large increases in return comovement during crises.

Relationship between developed, European and South Asian stock markets: a multivariate analysis

Purpose The assessment of interdependence between stock markets is an important aspect of international portfolio management. The purpose of this paper is to examine and highlight the diversification potential of South Asian stock markets vis-à-vis developed and European stock markets. Design/methodology/approach The developed stocks markets include USA and UK, and South Asian stock markets include India, Pakistan and Sri Lanka while DJ STOXX 600 index is used to represent the European stock markets. Monthly data are used to examine long-run relationship through ARDL bound testing approach and estimates are obtained using DLOS. Short-term dynamics are captured through vector error correction-based Granger causality. Findings South Asian stock markets are closely linked with each other; similarly, developed/European markets are interlinked. US stock market not only impacts European stock markets, it also Granger cause South Asian stock markets. The findings suggest increase in comovement of South Asian stock markets with the global markets after financial crises of 2007-2008. Practical implications The diversification benefits of South Asian stock markets for international investors are still evident due to their low relationship (in both long and short run) with developed/European stock markets. Originality/value Given the emergence of South Asian stock markets, new insight on their relationship with developed stock markets can provide interesting findings for international portfolio diversification. The South Asian equity markets are an important source of investment because of their immense growth and weak correlation with international markets.

International Real Estate Review

UK home prices often exhibit only moderate (and sometimes barely positive) correlation across different regions. This reflects segmentation in the national housing market and also provides an apparent opportunity for lenders and investors to diversify their exposure to regional downturns, for instance, by creating residential mortgage backed securities out of geographically dispersed home loans. Unfortunately, in a crisis, correlations may rise, and the benefits from geographical diversification may disappear just when investors desire them the most. By using a flexible generalized autoregressive conditional heteroskedasticity technique, we 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. Lenders, as well as investors in mortgage-backed and other housing securities should thus not rely on house price correlations calculated during ¡§normal¡¨ times.

High Frequency Trading and Co-Movement 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 co-movement in returns and in liquidity. About one-third of the increase in return co-movement 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 co-movement 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.

Dynamic correlations and domestic-global diversification

This study designs a generalized dynamic conditional correlation (DCC) model to examine three dynamic elements involved in the correlations between domestic and world stock markets. Further, we apply this generalized DCC model to the domestic-global portfolio establishment and a comparative analysis with the conventional CCC (constant conditional correlation) is conducted. Our empirical results are consistent with the following notions. First, the domestic and global markets are strongly correlated when both simultaneously find themselves in the same state of volatility. Conversely, this correlation is weaker when a different volatility state characterizes each market. Second, persistence and correlation clustering are presented in domestic-global markets, whereas this self-dependent process involved in cross-market correlations is insignificant in certain markets. Third, market integration leads to an increase in co-movement between domestic and global markets. Finally, although the domestic-global portfolio effectiveness tests demonstrated the superior performance of our generalized DCC model in comparison with the conventional CCC and DCC models, we further indicate that the benefits mainly rely on reductions in risk, rather than increases in mean returns.

Does Common Analyst Coverage Explain Excess Comovement?

This article shows that correlated errors in news about fundamentals are an important, rational determinant of excess comovement. Individual analysts’ forecast errors tend to be correlated across stocks. Using a proxy for correlated forecast errors based on analyst coverage, I find that stocks with similar sets of analysts exhibit more excess comovement, controlling for industry and other variables. Exogenous changes in commonality in analyst coverage around i) brokerage firm mergers and ii) additions to an index lead to changes in excess comovement. This information channel explains 10% to 25% of the increase in comovement around additions to the S&P 500 index.

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

There is a seven year period between the time that a country first learns that it has won a bid to host the Olympics to the playing of the games. We investigate whether investors use the Olympics as a category for investment over this time period. We examine two hosting countries: China in 2008 and the UK in 2012, and identify a set of stocks from a broad range of industries that are mentioned by media outlets as either directly or indirectly involved in the Olympics. We find that in both countries, Olympic stocks exhibit increases in comovement of returns after the Olympics are announced and declines in comovement after the games are played. We also find that Olympic stocks earn large excess returns when the stock market has performed well, consistent with investors moving funds into these stocks after observing strong past stock price performance. However, these excess returns are lost in subsequent market downturns. Further, evidence suggests that the Olympic Games have little impact on cash flows or earnings. Overall, our evidence suggests that Olympic euphoria is sufficient in both China and the UK to influence stock returns and valuations but the overall fundamental benefits of the Olympics are small.

Interdependence between Greece and other European stock markets: A comparison of wavelet and VMD copula, and the portfolio implications

The interdependence of Greece and other European stock markets and the subsequent portfolio implications are examined in wavelet and variational mode decomposition domain. In applying the decomposition techniques, we analyze the structural properties of data and distinguish between short and long term dynamics of stock market returns. First, the GARCH-type models are fitted to obtain the standardized residuals. Next, different copula functions are evaluated, and based on the conventional information criteria and time varying parameter, Joe–Clayton copula is chosen to model the tail dependence between the stock markets. The short-run lower tail dependence time paths show a sudden increase in comovement during the global financial crises. The results of the long-run dependence suggest that European stock markets have higher interdependence with Greece stock market. Individual country’s Value at Risk (VaR) separates the countries into two distinct groups. Finally, the two-asset portfolio VaR measures provide potential markets for Greece stock market investment diversification.

Time-Varying and Spatial Herding Behavior in the US Housing Market: Evidence from Direct Housing Prices

This paper investigates herding behavior in the US residential housing market. The sample period is 1975 M01 to 2015 M06. The study utilizes the housing price index of each of the 50 states and Washington DC to form nine census region-based markets, or portfolios and then employs switching and quantile regressions to examine the spatial and time-varying disparities of housing return dispersions and investors’ herding behavior. The study finds that the degree of herding varies across regimes, regions and conditional distributions. The regime-specific herd formation may be partially originated by extreme housing market conditions, bull and bear housing market conditions, uncertainty in national financial markets, economic recessions and uncertainty of economic policies. The bull housing markets exhibits stronger effects on return dispersion than down markets, which is consistent with the “flight-to-safety” consensus behavior of investors. The study also finds that positive and negative linear and nonlinear returns magnify dispersions in an asymmetric manner. The increase in co-movement and interdependence of state and regional-level housing markets returns among geographically diverse states and regions offer little hope of successful geographical portfolio diversification strategies for U.S housing market investors. Moreover, time-invariant modeling may yield incorrect inferences regarding herd formation in regional housing markets.

Financialization in commodity markets: A passing trend or the new normal?

Abstract In this paper, we show that large inflows into commodity investments, a recent phenomenon known as financialization, has changed the behavior and dependence structure between commodities and the general stock market. The common perception is that the increase in comovements is the result of distressed investors selling both assets during the 2007–2009 financial crisis. We show that financial distress alone cannot explain the size and persistence of comovements. Instead, we argue that commodities have become an investment style for institutional investors. Given that institutional investors continue to target funds into commodities, we predict spillovers between commodities and the stock market to remain high in the future.

Comovement and Financialization in the Commodity Market

We investigate how the correlations amongst commodity futures have changed since the early 2000s. Using data from 1998 to 2011, we examine differences in the dependence structure of index and off-index commodities, and three major commodities indexes. We find that non-energy commodities included in the index exhibit an increase in comovement with the respective index, whereas commodities off the index do not. We interpret our findings as providing some evidence in support of post-2005 commodity financialization. We show that our results are robust to alternative explanations – non-trading effects and common fundamental characteristics. Finally, our results are supported by the analysis of high-frequency returns dynamics by means of the so called realised beta.

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

Executive SummaryHome 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” times.

Financialization in Commodity Markets: Disentangling the Crisis from the Style Effect

In this paper, we show that large inflows into commodity investments, a recent phenomenon known as financialization, has changed the behavior and dependence structure between commodities and the general stock market. The common perception is that the increase in co-movements is the result of distressed investors selling both assets during the 2007-2009 financial crisis. We show that financial distress alone cannot explain the size and persistence of co-movements. Instead, we argue that commodities have become an investment style for institutional investors. Given that institutional investors continue to target funds into commodities, we predict spillovers between commodities and the stock market to remain high in the future.

Common dynamics of nonenergy commodity prices and their relation to uncertainty

The purpose of this article is to improve the empirical evidence on commodity prices in various dimensions. First, we attempt to identify the extent of comovements in 44 monthly nonenergy commodity price series in order to ascertain whether the increase in comovement is a recent term phenomenon. Second, we attempt to determine the role of uncertainty in determining comovements among nonenergy prices in the short run. We diagnose the overall comovement using a dynamic factor model estimated by principal components. A factor-augmented vector autoregressive approach is used to assess the relationship of fundamentals, financial and uncertainty variables with the comovement in commodity prices. We find a greater synchronization among raw materials since December 2003. Since that date, uncertainty has played an important role in determining short-run fluctuations in nonenergy raw material prices.

Forbes and Rigobon’s method of contagion analysis with endogenously defined crisis periods – an application to some of Eurozone’s stock markets

The existent literature provides numerous definitions and statistical methods for analysis of contagion in the financial markets. The definition of shift contagion of Forbes and Rigobon (2001) and their adjusted correlation analysis (Forbes and Rigobon, 2002) have gained a lot of attention but the later faces the problem of ad hoc determination of the crisis periods and the issue of volatility adjustment. The aim of this paper is to elaborate the weaknesses of the method of Forbes and Rigobon and to provide a modification of their test that addresses these issues. To achieve this, a moving-window approach of Forbes and Rigobon’s (2002) method is proposed, by splitting the moving-windows into two equally sized sub-windows. We then apply the modified method to examine whether there was a (shift) contagion in the stock markets of five Eurozone countries (namely France, Germany, Ireland, Italy, and Spain) in the time period from December 2003 to January 2012. We found that shift contagion has played an important role in the propagation of shocks in the investigated stock markets during the crises. The start of the Greece’s debt crisis in May 2010 coincided with contagion from the Ireland’s, Italy’s, and Spain’s stock markets to the stock markets of France and Germany. Similar episodes of contagion were indentified around the Middle East financial crisis, at the end of 2006 and the start of 2007. The global financial crisis coincided with contagion from the Italy’s and Spain’s to the German stock market, while the Ireland’s debt crisis with contagion from the Ireland’s to the German stock market. The results of the paper have important implications for the investors in these stock markets. In the mainstream financial literature it has been recognized that international diversification reduces the total risk of a portfolio. This is due to non-perfect positive co-movement between returns of the portfolio assets. Increased co-movement between asset returns, identified during financial market turmoil, therefore can diminish the advantage of internationally diversified investment portfolios. The contagion analysis is also important for financial sector supervisory authorities and the monetary policy as different policy actions may be successful when the increase in co-movement between financial markets is a result of contagion or a result of a change in interdependence between the markets.DOI: http://dx.doi.org/10.5755/j01.ee.24.4.5419

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.

Co-Movement and Index Changes - Evidence from The Emerging Indian Stock Market

This study investigates the return co-movement around the benchmark Nifty index changes for the period 1999-2010 in the Indian stock market. We find evidence of significant increase in co-movement between the added stocks and the Nifty index subsequent to additions to the benchmark Nifty index. On the contrary stocks deleted from the Nifty index do not evidence decreased co-movement between the deleted stocks and the Nifty index. We have employed various methodologies used by Vijh(1994), Barberis et al(2002) and Greenwood and Sosner (2002) and the results suggest that the information related views explain the Nifty index changes in the emerging Indian stock market.