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Financial Markets in East Asia and Europe during the Global Financial Crisis

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  • Anders C. Johansson

Abstract

This paper analyzes equity market movements in East Asia and Europe during the global financial crisis. Extending the methodology in Chakrabarti and Roll (2002), we study regional as well as country-regional volatility, covariance and correlation. We also analyze regional and country-regional tail dependence in the two regions. The results show that volatility and covariance patterns in East Asia and Europe were relatively stable until the second half of 2008. Correlations were higher in Europe, but relatively high in East Asia as well. Both regions thus exhibit an overall increase in comovements compared to the time of the Asian financial crisis. There was a sharp decline in regional correlation during the third quarter of 2008 in both East Asia and Europe, which was then followed by a strong increase. The spread of the crisis affected Europe more, with resulting higher regional comovements. Moreover, average tail dependence stayed relatively stable in both regions throughout the pre-crisis and crisis periods with a notably higher level of tail dependence in Europe. Surprisingly, countries in East Asia such as China that are usually seen as insulated from the rest of the region show signs of increasing market integration with the rest of the region. The increasing level of financial market integration and the high level of comovements during times of international financial turmoil demonstrate the limited benefit of diversification in regional portfolios.

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Bibliographic Info

Article provided by Wiley Blackwell in its journal The World Economy.

Volume (Year): 34 (2011)
Issue (Month): (07)
Pages: 1088-1105

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Handle: RePEc:bla:worlde:v:34:y:2011:i::p:1088-1105

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Cited by:
  1. Johansson, Anders C., 2010. "Stock and Bond Relationships in Asia," Working Paper Series 2010-14, China Economic Research Center, Stockholm School of Economics.
  2. Mollah, Sabur & Zafirov, Goran & Quoreshi, AMM Shahiduzzaman, 2014. "Financial Market Contagion during the Global Financial Crisis," CITR Working Paper Series 2014/05, Center for Innovation and Technology Research, Blekinge Institute of Technology.
  3. El GHINI, Ahmed & SAIDI, Youssef, 2013. "Financial Market Contagion During the Global Financial Crisis: Evidence from the Moroccan Stock Market," MPRA Paper 53392, University Library of Munich, Germany.

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