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Frequency aspects of information transmission in a network of three Western equity markets

Listed author(s):
  • Harald Schmidbauer

    ()

    (BRU-IUL, ISCTE Business Research Unit, ISCTE-IUL, Lisboa, Portugal)

  • Angi Rosch

    ()

    (FOM University of Applied Sciences, Munich, Germany)

  • Erhan Uluceviz

    ()

    (Kemerburgaz University, Istanbul, Turkey)

Registered author(s):

    Cycles in the behavior of stock markets have been widely documented. There is an increasing body of literature on whether stock markets anticipate business cycles or its turning points. Several recent studies assert that financial integration impacts positively on business cycle comovements of economies. We consider three Western equity markets, represented by their respective stock indices: DJIA (USA), FTSE 100 (UK), and Euro Stoxx 50 (euro area). Connecting these three markets together via vector autoregressive processes in index returns, we construct \propagation values" to measure and trace, on a daily basis, the relative importance of a market as a volatility creator within the network, where volatility is due to a return shock in a market. A cross-wavelet analysis reveals the joint frequency structure of pairs of the propagation value series, in particular whether or not two series tend to move in the same direction at a given frequency. Our main findings are: (i) From 2001 onwards, the daily propagation values of markets have been fluctuating much less than before, and high frequencies have become less pronounced; (ii) the European markets are in phase at business cycle frequency, while the US market is not in phase with either European market; (iii) in 2008, the euro area has taken over the leading role. This approach not only provides new insight into the time-dependent interplay of equity markets, but it can also replicate certain findings of traditional business cycle research, and it has the advantage of using only readily available stock market data.

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    File URL: http://eaf.ku.edu.tr/sites/eaf.ku.edu.tr/files/erf_wp_1616.pdf
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    Paper provided by Koc University-TUSIAD Economic Research Forum in its series Koç University-TUSIAD Economic Research Forum Working Papers with number 1616.

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    Length: 21 pages
    Date of creation: Dec 2016
    Handle: RePEc:koc:wpaper:1616
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    1. Aguiar-Conraria, LuI´s & Joana Soares, Maria, 2011. "Business cycle synchronization and the Euro: A wavelet analysis," Journal of Macroeconomics, Elsevier, vol. 33(3), pages 477-489, September.
    2. Luís Francisco Aguiar & Maria Joana Soares, 2011. "The Continuous Wavelet Transform: A Primer," NIPE Working Papers 16/2011, NIPE - Universidade do Minho.
    3. Aguiar-Conraria, Luís & Azevedo, Nuno & Soares, Maria Joana, 2008. "Using wavelets to decompose the time–frequency effects of monetary policy," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 387(12), pages 2863-2878.
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