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Modeling threshold effects in stock price co-movements: a vector nonlinear cointegration approach

Author

Listed:
  • Chlibi Souhir

    (LAREQUAD – University of Tunis El Manar, Tunisia; and LITEM – University of Evry, France)

  • Jawadi Fredj

    (University of Evry, 2, rue Facteur Cheval, 91000, France)

  • Sellami Mohamed

    (EDC Paris Business School, Paris La Defense 1, 70 Galerie des Damiers, 92415 Courbevoie, France)

Abstract

This paper studies the hypothesis of stock price comovements between the US market and three different regions [the G6, BRICS and MENA (Middle East North Africa)] during calm and crisis periods. It extends the study by (Chlibi, S., F. Jawadi, and M. Sellami. 2016. “Analyzing Heterogeneous Stock Price Comovements through Hybrid Approaches.” Open Economies Review 27: 541–559) and models stock price comovements in a nonlinear multivariate framework. In particular, we develop an empirical nonlinear specification to model heterogeneity in stock price comovements, based on the multivariate threshold cointegration framework of (Hansen, B. E., and B. Seo. 2002. “Testing For Two-Regime Threshold Cointegration in Vector Error Correction Models.” Journal of Econometrics 110: 293–318). Our findings point to the presence of significant threshold cointegration relationships that are activated per regime. Specification of these threshold effects in stock price comovements is particularly useful to help investors to rebalance and adjust their portfolios so as to optimize their investment and diversification strategies.

Suggested Citation

  • Chlibi Souhir & Jawadi Fredj & Sellami Mohamed, 2017. "Modeling threshold effects in stock price co-movements: a vector nonlinear cointegration approach," Studies in Nonlinear Dynamics & Econometrics, De Gruyter, vol. 21(1), pages 47-63, February.
  • Handle: RePEc:bpj:sndecm:v:21:y:2017:i:1:p:47-63:n:5
    DOI: 10.1515/snde-2016-0049
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    References listed on IDEAS

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    More about this item

    Keywords

    stock price comovements; vector threshold cointegration; vector threshold error correction model (VTECM);
    All these keywords.

    JEL classification:

    • C2 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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