Sources of time varying return comovements during different economic regimes: evidence from the emerging Indian equity market

We study the economic and non-economic sources of stock return comovements of the emerging Indian equity market and the developed equity markets of the US, UK, Germany, France, Canada and Japan. Our findings show that the probability of extreme comovements in the economic contraction regime is relatively higher than in the economic expansion regime. We show that international interest rates, inflation uncertainty and dividend yields are the main drivers of the asymmetric return comovements. Findings reported in the paper imply that the impact of interest rates and inflation on return comovements could be used for anticipating financial contagion and/or spillover effects. This is particularly critical since during extreme market conditions, the tail return comovements can potentially reveal critical information for active portfolio management

An empirical investigation of the determinants of asset return comovements

Understanding financial asset return correlation is a key facet in asset allocation and investor’s portfolio optimization strategy. For the last decades, several studies have investigated this relationship between stock and bond returns. But, fewer studies have dealt with multi-asset return dynamics. While initial literature attempted to understand the fundamental pattern of comovements, later studies model the economic state variables influencing such time-varying comovements of primarily stock and bond returns. Research widely acknowledges that return distributions of financial assets are non-normal. When the joint distributions of the asset returns follow a non-elliptical structure, linear correlation fails to provide sufficient information of their dependence structure. In particular two issues arise from this existing empirical evidence. The first is to propose a more reliable alternative density specification for a higher-dimensional case. The second is to formulate a measure of the variables’ dependence structure which is more instructive than linear correlation. In this work I use a time-varying conditional multivariate elliptical and non-elliptical copula to examine the return comovements of three different asset classes: financial assets, commodities and real estate in the US market. I establish the following stylized facts about asset return comovements. First, the static measures of asset return comovements overestimate the asset return comovements in the economic expansion phase, while underestimating it in the periods of economic contraction. Second, Student t-copulas outperform both elliptical and non-elliptical copula models, thus confirming the ii dominance of Student t-distribution. Third, findings show a significant increase in asset return comovements post August 2007 subprime crisis ... [cont.].SOM Prize winne

Nonlinearities and synchronization of business cycles : a novel approach

Mestrado em EconomiaEsta dissertação estuda os padrões de sincronização de ciclos económicos numa amostra composta por 18 países desenvolvidos e a Zona Euro ao longo do período 1970:1-2008:1. Para realizar este estudo, propomos um novo modelo de componentes não observáveis multivariado com markov-switching e interdependência de estados variável no tempo, no qual a sincronização é modelizada como uma componente comum variável no tempo entre os ciclos económicos. Para estimar o modelo, desenvolvemos um filtro de Kalman adequado, que permite a projecção das componentes não observáveis e a estimação dos hiperparâmetros por máxima verosimilhança. Propomos também um novo fullsample smoother para recalcular as componentes não observáveis do modelo com base em toda a informação amostral. Usamos este modelo para testar 3 hipóteses: se a criação da União Monetária Europeia promoveu um aumento na sincronização dos ciclos económicos entre os seus membros; se a integração promoveu uma mudança na filiação cíclica com o ciclo económico dos EUA; se existe o surgimento de um ciclo económico agregado da Zona Euro. Os resultados mostram que a sincronização cíclica dos países da Zona Euro com a Zona Euro agregada foi superior à dos restantes países. No entanto, para a maioria dos países da Zona Euro, a sincronização com a Zona agregada aumentou até ao início da década de 90, e diminuiu a partir desse período. Apesar de existir um ligeiro aumento na sincronização com a Zona Euro agregada para algumas economias participantes em torno do momento da introdução da moeda única, não somos capazes de detectar um “efeito Euro” claro. Por outro lado, para a maioria das economias, a introdução da moeda única é coincidente com uma redução na sincronização com o ciclo dos EUA. Finalmente, não encontramos evidência do surgimento de um ciclo económico agregado da Zona Euro. ABSTRACT: This dissertation studies the patterns of business cycle synchronization across a sample of 18 developed countries and the aggregate Euro Area over the period 1970:1-2008:1. To perform this study, we propose a novel multivariate unobservedcomponents model with markov-switching and time-varying state interdependence, in which synchronization is modelled as a time-varying common component between the business cycles. To estimate the model, we develop an adequate Kalman filter, which allows the projection of the unobserved components and the estimation of the hyperparameters by maximum likelihood. We also propose a new full-sample smoother to recompute the unobserved components of the model based on all in-sample information. We use this model to test 3 hypothesis: whether the creation of the European Monetary Union promoted an increase in business cycle synchronization among its members; whether the integration has promoted a change in the cyclical affiliation with the US business cycle; and whether there is an emergence of an aggregate Euro Area business cycle. The results show that synchronization between the Euro Area countries with the aggregate Euro Area has been higher than for the remaining countries. Nevertheless, for the majority of the Euro Area countries, synchronization with the aggregate Area increased until the beginning of the 1990s, and dropped from that period onwards. Moreover, despite the existence of a slight increase in synchronization with the aggregate Euro Area for some participant economies around the timing of the introduction of the common currency, we are not able to uncover a clear “Euro effect”. On the other hand, for most of the economies, the introduction of the common currency is shown to be coincident with a drop in synchronization with the US business cycle. Finally, we do not find evidence of the emergence of an aggregate Euro-Area business cycle

Three Essays on Economic and Financial Risks in Different Asset Classes and Diverse Regions

My dissertation is titled "Economic and Financial Risks in Different Asset Classes and Different Regions," which encompasses three essays on economic activity and financial risks for the United States, interactions between Islamic and conventional stock markets, and downside risks and optimal diversified equity, bond and commodity portfolios for the PIIGs and CORE of the eurozone. The dissertation investigates migration and cascading of the different kinds of risks in the respected financial markets or regions in an economic policy uncertainty and financial stress environment.Ph.D., Economics -- Drexel University, 201

Oil and stock market interlinkages: The case of the GCC bloc

Motivated by increased stock market integration, gaps in the literature and the recent financialization of oil markets, this thesis studies the behaviour of the fledgling Gulf Cooperation Council (GCC) stock markets against innovations in international financial markets and oil prices. The key results of the thesis highlight the relative segregation of the GCC markets and the importance of the EU and the UAE in determining the inter- and intra-regional equity linkages, respectively. In terms of their reactions to oil shocks, similar to the financial markets of oil-exporting nations, the GCC markets are stimulated by oil precautionary demand shocks during bearish phases, yet, the intensity of the impact is significantly more pronounced. Also, oil price change is a key factor of the US-GCC and EU-GCC stock market interdependence. Finally, oil innovations display upper tail dependence with US-GCC and EU-GCC correlations. The dissertation contributes to the existing literature by remapping the information transmission mechanism in the GCC by examining the inter- and intra-regional linkages in the GCC while considering both mean and variance linkages. Additionally, using the Kilian (2009) method, the thesis contributes to the literature by examining oil shocks influence on the GCC markets in contrast to their counterparts in oil-exporting and importing economies. Notably, this research characterises the oil-equity relation depending on the type of oil shock, the energy profile of the country and the state of the financial market. Finally, for the first time in the macroeconomic literature, the thesis establishes oil as a key macroeconomic determinant in the GCC stock market interdependence. The results present the GCC as a fresh destination to welcome funds from global investors and portfolio managers interested in cross-country diversification benefits. Also, oil price change is presented as a tool to forecast equity correlations which is vital for portfolio construction and balancing efforts. The outcome of the thesis conveys information for domestic policymakers in the GCC attempting to formulate macroeconomic policies. Finally, the outcomes contribute to academic efforts in understanding the interrelations between financial markets in the context of emerging/frontier markets

Comovements in volatility in the euro money market

This paper assesses the sources of volatility persistence in Euro Area money market interest rates and the existence of linkages relating volatility dynamics. The main findings of the study are as follows. Firstly, there is evidence of stationary long memory, of similar degree, in all series. Secondly, there is evidence of fractional cointegration relationships relating all series, except the overnight rate. Two common long memory factors are found to drive the temporal evolution of the volatility processes. The first factor shows how persistent volatility shocks are trasmitted along the term structure, while the second factor points to excess persistent volatility at the longer end of the yield curve, relative to the shortest end. Finally, impulse response analysis and forecast error variance decomposition point to forward transmission of shocks only, involving the closest maturities. JEL Classification: C32, F30, G10fractional integration and cointegration, fractional vector error correction model, liquidity e¤ect, money market interest rates, realized volatility

Is gold an inflation-hedge? Evidence from an interrupted Markov-switching cointegration model

This paper investigates the inflation hedging role of gold price after controlling for the prices of other investment assets. We use annual data on the U.S. economy spanning from 1833 to 2013. We employ a recently developed flexible nonlinear approach that allows for potential ‘interruption’ in the long run equilibrium relationship in which the equilibrium term dynamics is modelled as an AR(1) depending upon an unobserved state process that is a stationary first-order Markov chain in two states, stationarity and non-stationarity. While, a battery of standard cointegration tests without and with breaks could not find evidence to support the inflation hedging role of gold, results from the flexible nonlinear approach indicate the existence of temporary cointegration between gold price and inflation during 1864, 1919, 1932, 1934, 1976, 1980 and 1982. The interruptions in the long-run relationship at different time periods seem to be associated with the different structural changes that affected the gold market.http://www.elsevier.com/locate/resourpol2017-06-30hb2016Economic

Volatility and asymmetric dependence in Central and East European stock markets

We study the effects of contagion around the global financial crisis (GFC) and the Eurozone crisis periods using German and UK returns, each paired with returns from Central and East European (CEE) stock markets that recently joined the European Union (EU). Using bivariate vector error-correction models (VECMs) estimated in GARCH(1,1), we find strong support for long-run equilibrium conditions. This finding suggests that tests of tail dependence using differenced VARs may be mis-specified when long-run equilibrium conditions apply. Past news has more persistence on current volatility in CEE markets than in the developed markets. Past volatility has more persistence in the developed markets compared to the CEE markets. The T-V symmetrized Joe–Clayton (T-V SJC) copula outperforms all other copulas in goodness-of-fit, including, the T-V Gaussian and Student t copulas. This result is supported by a differenced VAR-GARCH (1,1). For CEE and developed market returns, no more than half of our market pairs exhibit significant increases in lower tail dependence, under the T-V SJC copula. Given the number of paired comparisons, the evidence on joint extreme dependence is weak. As such, CEE stock markets experienced little contagion effects during the GFC and Eurozone crisis periods, contrary to prior results. We find that the legal environment negatively impacts financial development, perhaps causing CEE and the EU markets to be isolated