Stock Market Comovements Research Articles

Your Vote and Your Confidence Matter: How to Explain and Exploit International Stock Market Co-Movements?

We investigate the determinants of international stock market co-movements, shedding light on the relevance of political and confidence factors. We propose a new characterization for the channel interconnecting politics and financial markets, disentangling two different components: political risk and economic policy risk. We provide evidence of the surprisingly low correlation between the latter variables, which are indeed priced differently. We show that exclusively relying on hard macro-data would not suffice to explain the statistically and economically high returns stemming from pairs trading strategies that load on stock market co-movements. Political risk explains and predicts returns driven by both short-term and long-run co-movements. For the latter, also foreign investors' confidence plays a crucial role. Consumers' and business confidence display significant predictive power, unlike most experts' evaluations. Pairwise differences in country risk are dramatically affected by political risk and even more by economic policy risk, with the latter being a strong predictor also in the long run.

Does Bilateral Market and Financial Integration Explains International Co-Movement Patterns1

This study aims to explore the relationship between market integration, foreign portfolio equity holding and inflation rates on international stock market linkages between Pakistan and India. To measure stock equity interlinkage, we constructed international co-movement index through rolling beta estimation. Market integration variable between these two countries is constructed using the International Capital Asset Pricing Model (ICAPM). To check the impact of market integration, foreign portfolio equity holding and inflation rate on Pakistan-Indian stock market co-movement, we applied autoregressive distributed lag (ARDL) estimation. ARDL estimation is applied due to different stationarity levels of the included variables. The level of convergence speed is measured by the introduction of error correction term (ECT) followed by variance decomposition analysis. Results of the study indicated presence of long term relationship among the included variables along with significance variance in bilateral co-movement due to inflation rate differential. The significance of inflation rate differences between these two countries are in accordance with portfolio balance theory stating that investors possess information about the macroeconomic variables thereby readjusting their portfolios for effective diversification.

Stock market comovements around the Global Financial Crisis: Evidence from the UK, BRICS and MIST markets

This paper analyses stock market co-movements around recent crises and explores the international portfolio diversification benefits available for UK investors holding a portfolio in the BRICS and MIST emerging markets. The application of conventional and regime-switch cointegration techniques suggests an absence of diversification benefits. Further evidence from application of a multivariate time-varying asymmetric model (i.e. AG-DCC) suggests that conditional correlation among the stock markets exhibits higher dependency when it is driven by negative shocks to the market. The asymmetric causality test provides supporting evidence of the decoupling hypothesis. The results indicate that the Chinese stock market is the most attractive option for the UK investor.

Dynamics of effective portfolio diversification among EFA markets: a heterogeneous panel analysis

This paper focuses on the role of various factors of international co-movement patterns among equity returns of frontier and emerging markets. This study originated from Markowitz portfolio theory (1952) after which Grubel (1968) applied his concepts of diversification. This study fills the previous gaps by providing information about role that various factors have on international stock market co-movement rather than relying only on the return correlation. We constructed an international co-movement index through rolling beta estimation method followed by the estimation of bilateral market and economic variables. In the end, we applied panel data analysis to find level of variance that these included markets, financial and macro-economic variables have on stock market co-movement. Results highlight significant role of market size differential and macro-economic variables in explaining return co-movement of Pakistan with rest of the countries. Significance of our macro-economic factors are in accordance with portfolio balance theory presented by Kodres and Pritsker (2002) stating that investors possess information about macro-economic variables thereby readjusting their portfolios for effective diversification.

Impact of sovereign rating changes on stock market co-movements: the case of Latin America

ABSTRACTWe aim to determine if long-term foreign currency sovereign rating assessments (from S&P, Moody’s and Fitch) for the advanced emerging Latin American countries (Brazil, Mexico and Chile) have any significant effect on the correlation between their stock market returns in the last decade. With that purpose in mind, we obtain the time-varying correlation by cDCC modeling using ARX-APARCH filtered returns. The analysis shows that the rating changes do not have a significant effect on the correlations in general. After testing for robustness, we reveal that an upgrade to an investment grade level for a country is more likely to positively diversify it from others in the region instead of creating a common positive regional investment environment. Results have important implications for investors and policymakers.

Oil price and stock market co-movement: What can we learn from time-scale approaches?

This paper study the relationship between oil and stock markets in G7 countries, by distinguishing between interactions based on fundamentals (long-term interdependence: high memory impact) and contagion (short-term interaction: transitory contamination). To do this, we propose in the first time two complementary frequency approaches based: the evolutionary co-spectral analysis and the wavelet approach allowing a time-varying measure of the dynamic correlation between the oil and stock markets over time and across time horizons. We find that interdependence between oil price and the stock market is more pronounced in the short and medium terms than in the long term. In addition, we prove that stock markets are more sensitive to oil shocks originating from demand shocks. These findings provide important policy implications for both policymakers, in terms of taking relevant actions regarding oil shocks originating from the demand side, and investors, in terms of a policy of diversification that depends on horizons.

The effect of security and market order flow shocks on co-movement

In this paper, we apply the smooth transition conditional correlation model to examine the impact that shocks to order flow imbalance have on stock market co-movement. We show that positive and negative shocks to security order flow reduce co-movement. Market order flow shocks have only a small impact on post shock correlations. Our results suggest that investors can increase diversification opportunities when forming dynamic portfolio strategies if they take account of security order flow information. We show that pre-shock firm characteristics allow investors to identify those stocks with the greatest diversification benefits.

Stock Market Co-Movement and Exchange Rate Flexibility: Experience of the Republic of Korea

This paper argues that for countries where equity investments dominate cross-border capital flows, the proper framework for analyzing the role of a flexible exchange rate system as a buffer against external shocks is the uncovered stock return parity condition, rather than the uncovered interest parity condition. Estimation of the stock return parity condition shows that it fails to hold in the Republic of Korea largely because of co-movement in the Republic of Korea and United States stock markets. Three global factors are largely responsible for the co-movement : global financial integration, which may be generating a global financial cycle; acceptance of insensitivity of exchange risk by global equity investors; and domestic investors imitating the trading behavior of foreign equity investors.

Volatility and co-movement: an analysis of stock markets behavior of selected emerging and developed countries

Financial markets around the world suffer significantly during the GFC and European debt crisis. Although the GFC is over, but the after-effect is still visible in most of the developed and emerging countries and stock markets remained volatile. In this paper, we analyse historical stock market volatility and co-movement behavior of three emerging markets and three developed economies from January 2001 to December 2012. We investigate whether the stock market volatilities and co-movement behaviors are correlated and affected by the GFC during the observation period. Our analysis of stock market behavior and co-movement analysis includes the standard historical volatility model and R-square estimates. We use the standard historical volatility model followed by Jones et al. (1998), Andersen and Bollerslev (1997) and Andersen and Bollerslev (1998); and the R-square metrics were suggested by Morck et al. (2000), Khandaker and Heaney (2009) and Alves et al. (2010). The selection criteria for the developed economies include geographical location, availability of stock return data and size of the equity market; and emerging markets are taken from the emerging Asian markets based on their recent market performance, growth rate and market capitalisation. We find evidence that the sample of emerging markets, exhibits higher stock market volatility during the sample period and these volatilities increases during the GFC. There is also evidence that the sample emerging countries exhibit a higher level of stock market co-movement behavior, and these markets were highly synchronous during the GFC. For example, China exhibits higher stock return co-movement behavior and, this behavior increase during the GFC. Further, we do not find any evidence of a statistically significant correlation coefficient between the volatility measures and stock return co-movement measures for our sample developed countries. However, these measures are statistically significant for the emerging country group. The example includes China and Malaysia. Our result provides evidence that stock market co-movement behavior or the R-squared matrix captures somewhat different aspects of stock market behavior other than the stock market volatility for the developed economies. Therefore, it is concluded that both these market models capture somewhat different aspects of stock market behavior and should be carefully used.

INTERNATIONAL STOCK MARKET COMOVEMENT AND NEWS

AbstractWe explore how news comovement drives a portion of stock return comovement using the Thomson Reuters international business news database. We develop a measure of news comovement similar in design to a well‐known measure of stock return comovement and find that news helps explain country‐level stock market comovement. Our results are novel in that we find that more news comovement is related to higher stock market comovement. The explanatory power of news comovement is found to be particularly strong in countries that have low total market capitalization, are more corrupt, and have lower accounting standards.

Stock market co-movements: Islamic versus conventional equity indices with multi-timescales analysis

This study examines market co-movements in Islamic and mainstream equity markets across different regions in order to discover contagion during 9 major crises and to measure integration between markets. Using wavelet decomposition to unveil the multi-horizon nature of co-movement, we find that the shocks were transmitted via excessive linkages, while the recent subprime crisis reveals fundamentals-based contagion. While Islamic markets show traces of reduced exposure to the recent crisis owing to low leverage effect, their less diversified portfolio nature increases vulnerability to other crises. We generally find incomplete market integration, with relatively higher fundamental integration for Islamic markets which may be attributable to their real sector allocation nature.

Global Financial Crisis and International Stock Market Co-Movements: An Empirical Study

The global financial crisis, after brewing for a while, actually started to demonstrate its consequences and encroachments in the middle of 2007 and into 2008. During this period the world stock markets have fallen, large financial institutions have been collapsed. From 2008 to 2010 it reflected as a big problem due to the U.S. Subprime credit crisis which has been began with massive defaults by Subprime borrowers in mortgage markets. This paper has analyzed the behavior or the movements of the stock markets during the crisis; both at overall market and Sectoral level (Financials, FMCG, Telecomm, Healthcare, IT, Oil gas/ energy) for the period of 2008-11. For this purpose, the study has considered mainly three stock markets; Bombay Stock Exchange (BSE-India), New York Stock Exchange (NYSE-USA) and London Stock Exchange (LSE-UK). The study is based on the daily market returns of the selected stock markets’ benchmarks viz; BSE-Sensex for India, DJIA for USA and FTSE 100 for UK. After the statistical analysis, the results of the study suggested that the all three selected countries have been affected by that crisis on somewhat level on the basis of both at market and Sector wise level.

Timescale-dependent stock market comovement: BRICs vs. developed markets

This paper examines the differences in the asset return comovement of the BRIC countries (Brazil, Russia, India and China), the other developed economies in their regions (Canada, Hong Kong and Australia) and the major industrialized economies (the U.K., Germany and Japan) with respect to the U.S. for different return periods. The novelty of the paper is that the stock return indices are decomposed to several timescales using wavelet analysis and that the results are further used as inputs for the dynamic conditional correlation (DCC) framework, which is used as a measure of comovement. The results propose that the level of stock market comovement depends on regional aspects, the level of development and especially on the timescale of returns. These factors should be carefully considered in designing internationally diversified portfolios. The BRICs provide some portfolio diversification benefits, but it is not justifiable to treat all BRICs as a homogeneous group of emerging economies in terms of stock market comovement. • Stock return series are decomposed into different timescales with wavelets • The co-movement between timescales is studied for several markets • The strength and dynamicity of the co-movement depend on the timescale • For lower (higher) timescales regional (development) factors dominate • BRICs cannot be treated as a single homogeneous group in terms of correlation

Changes of Stock Market Comovement between the US and Northeast Asian Countries After 2000

Changes of Stock Market Comovement between the US and Northeast Asian Countries After 2000

Volatility Spillovers and Stock Market Co-Movements Among Western, Central and Southeast European Stock Markets**

The aim of this paper is to examine the return and volatility spillovers and stock market co-movements among Western, Central and Southeast European stock markets. To examine the volatility spillover effects we employ a multivariate GARCH-BEKK (1, 1) model on a daily data from 2005 to 2014. There is a high and stable conditional correlation between Central and Western European markets during most of the analyzed period and the conditional correlation rises sharply during the periods of financial turmoil, suggesting some evidence on contagion. Conditional correlation between Croatian and Romanian markets and their Western counterparts is modest but it increases during the periods of financial crisis. Conditional correlation coefficients indicate that Macedonian and Serbian stock markets are relatively isolated from the advanced European markets. The return spillovers are investigated with the forecast-error variance decomposition based on the generalized VAR model. Following Diebold and Yilmaz (2012), we develop “spillover indices” based on the variance decomposition results on the generalized VAR model. The results indicate that total spillover index rose sharply during the periods of major financial disruptions. DAX and FTSE100 are the major net transmitters of spillovers to Central and Southeast European markets. There are bi-directional spillovers between DAX and FTSE100, between PX and WIG-20 and between MBI10 and BELEX15.

MONGOLIAN AND WORLD EQUITY MARKETS: VOLATILITIES AND CORRELATIONS

After more than 10 years since the establishment of the Shanghai Cooperation Organization (SCO), this paper studies how variances and correlations have evolved in four SCO countries' equity markets (China, Kazakhstan, Mongolia, and Russia) relative to Japanese, US and EU markets. We focus on the Mongolian equity market. We trace stock market co-movements of Mongolia and SCO member countries to the world market since the inauguration of the SCO in 2001. We also take into account the effects of recent world financial crisis in the region. As compared to the increasing global trend of market integration among countries, we don't find any significant contagion among SCO countries in the first half of sample periods. After 2005, market integrations among SCO countries are evident.

Are stock market crises contagious? The role of crisis definitions

Financial contagion studies generally examine whether co-movement between markets increases during a crisis. We use a flexible co-movement measure to examine how conclusions of such analyses depend on the sample chosen as the ‘crisis’. To this end, we analyse stock market co-movement during the 1997 Asian crisis and the 2007 global financial crisis for all possible source countries and for all possible time periods or extreme return quantiles. This way we account for the main crisis dating approaches adopted in the literature. Our results suggest there is no clear relationship between excess co-movement and commonly used crisis samples.

A spatial analysis of international stock market linkages

We employ spatial econometrics techniques to investigate to what extent countries’ economic and geographical relations affect their stock market co-movements. Among the relations that we analyze, bilateral trade proves to be best suited to capture co-variations in returns. We find a strong effect of a unit shock to three regionally dominant countries, namely the US, the UK, and Japan, on other countries through the trade linkage. The degree of stock market dependence increases and the importance of proximity decreases over time and during recessions. We also analyze several regional crises and find a large impact of Thailand on its trade neighbors during the Asian crisis.

Decomposing U.S. Stock Market Comovement into spillovers and common factors

This paper disentangles direct spillovers and common factors, the sources of correlations in simultaneous heteroscedastic systems. While these different components are not identifiable by standard means without restrictions, it is shown that they can be distinguished by specifying the variances of the latent idiosyncratic and common shocks as ARCH-type processes. By applying an adapted Kalman filter estimation method to Dow and Nasdaq stock returns, predominant spillovers from the Dow are found, as well as substantial rising factor exposure. While the latter is shown to prevail in the recent global financial crisis, volatility in the dot-com bubble period was driven by Nasdaq shocks.

International Real Estate Review

The main contribution of this study is to examine the extreme dependence between the real estate securities and stock markets in Australia, China, Hong Kong, Japan, Malaysia, the Philippines, Singapore and Taiwan between January 1995 and March 2011. For each market, we derive time series tail dependence coefficients (TDC) which measure how likely financial returns move in extreme market conditions by using the dynamic conditional correlation (DCC) methodology provided by Engle (2002). Overall, our results indicate that Singapore, the Philippines and Hong Kong have the highest extreme real estate–stock market co-movement of at least 50%. In addition, during the global financial crisis (GFC) period, the securitized real estate and common stock markets in China, Hong Kong, Japan, the Philippines and Singapore displayed the highest extreme dependence to react together to financial turmoil. The results in this paper also show that the extreme dependence patterns of real estate stock markets are similar for many of the Asia-Pacific economies. Finally, correlation coefficients are not adequate for explaining extreme co-movements between the securitized real estate and common stock markets in the longer period, as well as in the two-year GFC periods. Our TDC modeling with Asia-Pacific securitized real estate and stock markets provide useful information and advice to international investors and risk management personnel in tactical asset allocation so as to manage the extreme dependence between securitized real estate and common stock market.