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Dynamic conditional correlations between Chinese sector returns and the S&P 500 index: An interpretation based on investment shocks

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  • Kim, Myeong Hyeon
  • Sun, Lingxia

Abstract

This paper examines dynamic conditional correlations between 12 Chinese sectors and the S&P 500 index for the period of 2006–2014. We show that those correlations vary significantly across sectors and over time. Within the general equilibrium framework of Papanikolaou's (2011), we interpret the heterogeneity of sector-level correlations as arising from their heterogeneous sensitivities to investment-specific shocks. We also verify our interpretation and find that sector-specific investment opportunities are significantly associated with the magnitude of dynamic conditional correlations. This paper thereby advances our understanding of sectoral heterogeneities from the perspective of their responses to an outer shock.

Suggested Citation

  • Kim, Myeong Hyeon & Sun, Lingxia, 2017. "Dynamic conditional correlations between Chinese sector returns and the S&P 500 index: An interpretation based on investment shocks," International Review of Economics & Finance, Elsevier, vol. 48(C), pages 309-325.
  • Handle: RePEc:eee:reveco:v:48:y:2017:i:c:p:309-325
    DOI: 10.1016/j.iref.2016.12.014
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    Keywords

    Dynamic conditional correlation; Sector portfolio; Investment-specific shock; Investment opportunity;

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models

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