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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.

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  • 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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    2. Aviral Kumar Tiwari & Sangram Keshari Jena & Satish Kumar & Erik Hille, 2022. "Is oil price risk systemic to sectoral equity markets of an oil importing country? Evidence from a dependence-switching copula delta CoVaR approach," Annals of Operations Research, Springer, vol. 315(1), pages 429-461, August.
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    5. Rasoul Amirzadeh & Asef Nazari & Dhananjay Thiruvady & Mong Shan Ee, 2023. "Modelling Determinants of Cryptocurrency Prices: A Bayesian Network Approach," Papers 2303.16148, arXiv.org.

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    More about this item

    Keywords

    Dynamic conditional correlation; Sector portfolio; Investment-specific shock; Investment opportunity;
    All these keywords.

    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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