Dynamic linkages between stock markets : the effects of crises and globalization

This paper investigates changes in the dynamics of linkages between selected national stock markets during the period 1995–2009. The analysis focuses on the possible effects of globalization and differences between crisis and non-crisis periods. We model the dynamics of dependencies between the series of daily returns on selected stock indices over different time periods, and compare strength of the linkages. Our tools are dynamic copula models and a formal sequential testing procedure based on the model confidence set methodology. We consider two types of dependencies: regular dependence measured by means of the conditional Spearman’s rho, and dependencies in extremes quantified by the conditional tail dependence coefficients. The main result consists of a collection of rankings created for the considered subperiods, which show how the mean level of strength of the dependencies have been changing in time. The rankings obtained for Spearman’s rho and tail dependencies differ, which allows us to distinguish between the results of crises and the effect of globalization.info:eu-repo/semantics/publishedVersio

Understanding Commonality in Liquidity Around the World

We examine how commonality in liquidity varies across countries and over time in ways related to supply determinants (funding liquidity of financial intermediaries) and demand determinants (correlated trading behavior of international and institutional investors, incentives to trade individual securities, and investor sentiment) of liquidity. Commonality in liquidity is greater in countries with and during times of high market volatility (especially, large market declines), greater presence of international investors, and more correlated trading activity. Our evidence is more reliably consistent with demand-side explanations and challenges the ability of the funding liquidity hypothesis to help us understand important aspects of financial market liquidity around the world, even during the recent financial crisis

Bond market and stock market integration in Europe: a smooth transition approach

This article investigates whether there has been a structural increase in financial market integration in nine European countries and the US in the period 1980 to 2003. We employ a GARCH model with a smoothly time-varying correlation to estimate the date of change and the speed of the transition between the low and high correlation regimes. Our test produces strong evidence of greater comovement across the board for both stock markets and government bond markets. Dates of change and speeds of adjustment vary widely across country linkages. Stock market integration is a more gradual process than bond market integration. The impact of European monetary union (EMU) is rather limited, as it has mainly affected the timing of bond market correlation gains (but hardly their size) and has had little discernible effect on stock market integration.

Time-varying correlations and interrelations:Firm-level-based sector evidence

Using firm-level data, we examine stock market correlations and interrelations for the G7 over the period 2000–2013. An examination using aggregate market data supports the view that correlations have risen and particularly so during crisis periods. Using firm-level data, which is tradeable, we establish sector portfolios. We consider three regression approaches. The results support, first, that correlations using firm data are lower than those observed using aggregate market index data. Second, the most important driver for home sector returns is the home market followed by the corresponding US sector. Third, correlations rose during the crisis but have stabilised and even fallen since. This supports the view that markets fall together but rise apart. Fourth, there is evidence that most sector correlations follow a market-wide component, but some sector correlations follow their own component. Subsequently, we examine the key drivers of time-varying correlations. We find that the market-wide component of correlations increases in a US bear market as well as with higher US market volatility and lower US interest rates. However, on a sector basis, there are notable exceptions with some correlations falling in a bear market. Together, these results support the view that diversification benefits remain across market sectors