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Explaining international stock correlations with CPI fluctuations and market volatility

Author

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  • Cai, Yijie
  • Chou, Ray Yeutien
  • Li, Dan

Abstract

This paper investigates the dynamic correlations among six international stock market indices and their relationship to inflation fluctuation and market volatility. The current research uses a newly developed time series model, the Double Smooth Transition Conditional Correlation with Conditional Auto Regressive Range (DSTCC-CARR) model. Findings reveal that international stock correlations are significantly time-varying and the evolution among them is related to cyclical fluctuations of inflation rates and stock volatility. The higher/lower correlations emerge between countries when both countries experience a contractionary/expansionary phase or higher/lower volatilities.

Suggested Citation

  • Cai, Yijie & Chou, Ray Yeutien & Li, Dan, 2009. "Explaining international stock correlations with CPI fluctuations and market volatility," Journal of Banking & Finance, Elsevier, vol. 33(11), pages 2026-2035, November.
  • Handle: RePEc:eee:jbfina:v:33:y:2009:i:11:p:2026-2035
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    References listed on IDEAS

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