Advanced Search
MyIDEAS: Login to save this article or follow this journal

Stock market correlations during the financial crisis of 2008–2009: Evidence from 50 equity markets

Contents:

Author Info

  • Kotkatvuori-Örnberg, Juha
  • Nikkinen, Jussi
  • Äijö, Janne
Registered author(s):

    Abstract

    Using data from 50 equity markets we examine conditional and unconditional correlations around two major banking events during the financial crisis of 2008–09. To measure the value of covariance information on the augmented DCC model used in the study, a portfolio in-sample estimation is performed. We show that by taking into account the change in the level of variance in high volatility periods, the estimates of the conditional covariance are more efficient in capturing the dynamics of the stock markets variance. Furthermore, in a two-asset allocation framework, the model consistently generates relatively low portfolio variances, implying substantial benefits in portfolio diversification.

    Download Info

    If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
    File URL: http://www.sciencedirect.com/science/article/pii/S1057521913000239
    Download Restriction: Full text for ScienceDirect subscribers only

    As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.

    Bibliographic Info

    Article provided by Elsevier in its journal International Review of Financial Analysis.

    Volume (Year): 28 (2013)
    Issue (Month): C ()
    Pages: 70-78

    as in new window
    Handle: RePEc:eee:finana:v:28:y:2013:i:c:p:70-78

    Contact details of provider:
    Web page: http://www.elsevier.com/locate/inca/620166

    Related research

    Keywords: Dynamic conditional correlation; Financial crisis; Interdependence;

    Find related papers by JEL classification:

    References

    References listed on IDEAS
    Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
    as in new window
    1. Kristin Forbes & Roberto Rigobon, 1999. "No Contagion, Only Interdependence: Measuring Stock Market Co-movements," NBER Working Papers 7267, National Bureau of Economic Research, Inc.
    2. Lorenzo Cappiello & Robert F. Engle & Kevin Sheppard, 2006. "Asymmetric Dynamics in the Correlations of Global Equity and Bond Returns," Journal of Financial Econometrics, Society for Financial Econometrics, vol. 4(4), pages 537-572.
    3. Chudik, Alexander & Fratzscher, Marcel, 2011. "Identifying the global transmission of the 2007-09 financial crisis in a GVAR Model," Working Paper Series 1285, European Central Bank.
    4. Engle, Robert & Colacito, Riccardo, 2006. "Testing and Valuing Dynamic Correlations for Asset Allocation," Journal of Business & Economic Statistics, American Statistical Association, vol. 24, pages 238-253, April.
    5. Mark T. Hon & Jack Strauss & Soo-Keong Yong, 2004. "Contagion in financial markets after September 11: myth or reality?," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 27(1), pages 95-114.
    6. Kenourgios, Dimitris & Samitas, Aristeidis & Paltalidis, Nikos, 2011. "Financial crises and stock market contagion in a multivariate time-varying asymmetric framework," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 21(1), pages 92-106, February.
    7. Naohiko Baba & Frank Packer, 2009. "From turmoil to crisis: dislocations in the FX swap market before and after the failure of Lehman Brothers," BIS Working Papers 285, Bank for International Settlements.
    8. Dwyer, Gerald P. & Tkac, Paula, 2009. "The financial crisis of 2008 in fixed-income markets," Journal of International Money and Finance, Elsevier, vol. 28(8), pages 1293-1316, December.
    9. Melvin, Michael & Taylor, Mark P, 2009. "The Crisis in the Foreign Exchange Market," CEPR Discussion Papers 7472, C.E.P.R. Discussion Papers.
    10. Engle, Robert, 2002. "Dynamic Conditional Correlation: A Simple Class of Multivariate Generalized Autoregressive Conditional Heteroskedasticity Models," Journal of Business & Economic Statistics, American Statistical Association, vol. 20(3), pages 339-50, July.
    11. Baba, Naohiko & Packer, Frank, 2009. "From turmoil to crisis: Dislocations in the FX swap market before and after the failure of Lehman Brothers," Journal of International Money and Finance, Elsevier, vol. 28(8), pages 1350-1374, December.
    12. Bartram, Söhnke M. & Bodnar, Gordon M., 2009. "No Place To Hide: The Global Crisis in Equity Markets in 2008/09," MPRA Paper 15955, University Library of Munich, Germany.
    13. Billio, Monica & Caporin, Massimiliano, 2010. "Market linkages, variance spillovers, and correlation stability: Empirical evidence of financial contagion," Computational Statistics & Data Analysis, Elsevier, vol. 54(11), pages 2443-2458, November.
    14. Antonios Antoniou & Gioia Pescetto & Antonis Violaris, 2003. "Modelling International Price Relationships and Interdependencies Between the Stock Index and Stock Index Futures Markets of Three EU Countries: A Multivariate Analysis," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 30(5-6), pages 645-667.
    15. Michael P. Dooley & Michael M. Hutchison, 2009. "Transmission of the U.S. Subprime Crisis to Emerging Markets: Evidence on the Decoupling-Recoupling Hypothesis," NBER Working Papers 15120, National Bureau of Economic Research, Inc.
    16. Kearney, Colm & Poti, Valerio, 2006. "Correlation dynamics in European equity markets," Research in International Business and Finance, Elsevier, vol. 20(3), pages 305-321, September.
    17. Syllignakis, Manolis N. & Kouretas, Georgios P., 2011. "Dynamic correlation analysis of financial contagion: Evidence from the Central and Eastern European markets," International Review of Economics & Finance, Elsevier, vol. 20(4), pages 717-732, October.
    18. Chudik, Alexander & Fratzscher, Marcel, 2011. "Identifying the global transmission of the 2007-2009 financial crisis in a GVAR model," European Economic Review, Elsevier, vol. 55(3), pages 325-339, April.
    19. Fratzscher, Marcel, 2009. "What explains global exchange rate movements during the financial crisis?," Journal of International Money and Finance, Elsevier, vol. 28(8), pages 1390-1407, December.
    20. Ang, Andrew & Chen, Joseph, 2002. "Asymmetric correlations of equity portfolios," Journal of Financial Economics, Elsevier, vol. 63(3), pages 443-494, March.
    21. Braun, Phillip A & Nelson, Daniel B & Sunier, Alain M, 1995. " Good News, Bad News, Volatility, and Betas," Journal of Finance, American Finance Association, vol. 50(5), pages 1575-1603, December.
    22. G. William Schwert, 2011. "Stock Volatility During the Recent Financial Crisis," NBER Working Papers 16976, National Bureau of Economic Research, Inc.
    23. François Longin, 2001. "Extreme Correlation of International Equity Markets," Journal of Finance, American Finance Association, vol. 56(2), pages 649-676, 04.
    24. Hartmann, Philipp, 2010. "Interaction of market and credit risk," Journal of Banking & Finance, Elsevier, vol. 34(4), pages 697-702, April.
    25. Baillie, Richard T & Myers, Robert J, 1991. "Bivariate GARCH Estimation of the Optimal Commodity Futures Hedge," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 6(2), pages 109-24, April-Jun.
    26. Bartram, Söhnke M. & Bodnar, Gordon M., 2009. "No place to hide: The global crisis in equity markets in 2008/2009," Journal of International Money and Finance, Elsevier, vol. 28(8), pages 1246-1292, December.
    27. Bollerslev, Tim & Engle, Robert F & Wooldridge, Jeffrey M, 1988. "A Capital Asset Pricing Model with Time-Varying Covariances," Journal of Political Economy, University of Chicago Press, vol. 96(1), pages 116-31, February.
    Full references (including those not matched with items on IDEAS)

    Citations

    Lists

    This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

    Statistics

    Access and download statistics

    Corrections

    When requesting a correction, please mention this item's handle: RePEc:eee:finana:v:28:y:2013:i:c:p:70-78. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Zhang, Lei).

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If references are entirely missing, you can add them using this form.

    If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.