Asymmetric and nonlinear inter-relations of US stock indices

The purpose of this paper is to examine the inter-relations among the US stock indices. Data of nine US stock indices spanning a period of sixteen years (2000-2015) are employed for this purpose. Asymmetries are examined via an error correction model (ECM). Non-linear inter-relations are researched via Breitung’s nonlinear cointegration, a M-G nonlinear causality model, shocks to the forecast error variance, a shock spillover index and an asymmetric VAR-GARCH (VAR-ABEKK) approach. The inter-relations are significant. Our results are robust across all types of inter-relations. They are highest in the Lehman Brothers sub-period. Higher stability after the EU debt crisis, enhances independence and growth for the US stock indices. To the best of our knowledge, this is the first study to examine the inter-relations of US stock indices. Most studies on inter-relations concentrate on the portfolio analysis to reveal diversification benefits among various asset markets internationally. Hence this study contributes to this literature on the inter-relations of a specific asset market (stock), and in a specific nation (USA). The evident inter-relations support the notion of diversification benefits in the US stock markets