Correlation vs. Causality in Stock Market Comovement
AbstractThis paper seeks to disentangle the sources of correlations between high-, mid- and lowcap stock indexes from the German prime standard. In principle, such comovement can arise from direct spillover between the variables or due to common factors. By standard means, these different components are obviously not identifiable. As a solution, the underlying study proposes specifying ARCH-type models for both the idiosyncratic innovations and a common factor, so that the model structure can be identified through heteroscedasticity. The seemingly surprising result that smaller caps have higher influence than larger ones is explained by asymmetric information processing in financial markets. Broad macroeconomic information is shown to enter the common factor rather than the segment-specific shocks.
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Bibliographic InfoPaper provided by Sonderforschungsbereich 649, Humboldt University, Berlin, Germany in its series SFB 649 Discussion Papers with number SFB649DP2007-064.
Length: 24 pages
Date of creation: Dec 2007
Date of revision:
Identification; Spillover; Common Factor; Structural EGARCH; DAX;
Find related papers by JEL classification:
- C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
- G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
This paper has been announced in the following NEP Reports:
- NEP-ALL-2007-12-15 (All new papers)
- NEP-ECM-2007-12-15 (Econometrics)
- NEP-ETS-2007-12-15 (Econometric Time Series)
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