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Correlation dynamics between Asia-Pacifc, EU and US stock returns

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  • Stuart Hyde
  • Donal Bredin
  • Nghia Nguyen

Abstract

This paper investigates the correlation dynamics in the equity markets of 13 Asia-Pacific countries, Europe and the US using the asymmetric dynamic conditional correlation GARCH model (AG-DCC-GARCH) introduced by Cappiello, Engle and Sheppard (2006). We find significant variation in correlation between markets through time. Stocks exhibit asymmetries in conditional correlations in addition to conditional volatility. Yet asymmetry is less appar- ent in less integrated markets. The Asian crisis acts as a structural break, with correlations increasing markedly between crisis countries during this period though the bear market in the early 2000s is a more significant event for correlations with developed markets. Our findings also provide further evidence consistent with increasing global market integration. The documented asymmetries and correlation dynamics have important implications for international portfolio diversification and asset allocation.

Suggested Citation

  • Stuart Hyde & Donal Bredin & Nghia Nguyen, 2007. "Correlation dynamics between Asia-Pacifc, EU and US stock returns," Centre for Financial Markets Working Papers 10197/1168, Research Repository, University College Dublin.
    • Handle: RePEc:rru:cfmwps:10197/1168
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    File URL: http://hdl.handle.net/10197/1168
    File Function: First version, 2007
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    JEL classification:

    • 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
    • F3 - International Economics - - International Finance
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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