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Economic Factors Contributing to Time-Varying Conditional Correlations in Stock Returns

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  • Nagayasu, Jun

Abstract

This paper attempts to find economic and financial factors contributing to the changing correlations of stock returns. Time-varying correlations were documented in previous studies, but a few attempts have been made to investigate their evolution. Using daily data from the Asia-Pacific region, this paper provides evidence that return correlations are negatively correlated with the distance between the markets. Furthermore, correlations tend to be higher in advanced countries and increase at times of the active trading (e.g., around the Lehman shock). Instead, the level of correlations declines among pairs of countries with less financial integration.

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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 28391.

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Date of creation: 01 Dec 2010
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Handle: RePEc:pra:mprapa:28391

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Keywords: Conditional correlations; DCC;

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  1. King, Mervyn A & Wadhwani, Sushil, 1990. "Transmission of Volatility between Stock Markets," Review of Financial Studies, Society for Financial Studies, vol. 3(1), pages 5-33.
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  6. Bayoumi, Tamim & Fazio, Giorgio & Kumar, Manmohan & MacDonald, Ronald, 2003. "Fatal Attraction," CEPR Discussion Papers 3870, C.E.P.R. Discussion Papers.
  7. Levy, Haim & Sarnat, Marshall, 1970. "International Diversification of Investment Portfolios," American Economic Review, American Economic Association, vol. 60(4), pages 668-75, September.
  8. Sheng-Yung Yang, 2005. "A DCC analysis of international stock market correlations: the role of Japan on the Asian Four Tigers," Applied Financial Economics Letters, Taylor and Francis Journals, vol. 1(2), pages 89-93, March.
  9. Carmen M. Reinhart & Sara Calvo, 1996. "Capital Flows to Latin America: Is There Evidence of Contagion Effects?," Peterson Institute Press: Chapters, in: Guillermo A. Calvo & Morris Goldstein & Eduard Hochreiter (ed.), Private Capital Flows to Emerging Markets After the Mexican Crisis, pages 151-171 Peterson Institute for International Economics.
  10. Flavin, Thomas J & Hurley, Margaret J & Rousseau, Fabrice, 2002. "Explaining Stock Market Correlation: A Gravity Model Approach," Manchester School, University of Manchester, vol. 70(0), pages 87-106, Supplemen.
  11. 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.
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