Returns, correlations, and volatilities in equity markets: Evidence from six OECD countries during the US financial crisis

Hyun-Seok Kim, Hong-Ghi Min and Judith A. McDonald

Economic Modelling, 2016, vol. 59, issue C, 9-22

Abstract: We investigate the dynamic interactions between stock-market excess returns, time-varying correlations and volatilities in six OECD countries and the United States during the US financial crisis and its aftermath. Using the seemingly-unrelated regression (SUR) and panel-regression models with return, correlation, and volatility equations, we show that excess returns can explain both correlations and volatilities and that own volatility can explain both excess returns and correlations. However, we find that correlations can explain neither excess returns nor volatilities. We find new and important evidence that ‘excess returns,’ ‘US excess returns,’ and ‘US volatilities’ should be included in the analysis of other countries' correlations and volatilities. The US T-bill-LIBOR interest-rate differential (TED spread) and foreign-exchange market volatility (FXV) negatively affect excess returns; however, the credit-default swap spread's effect is insignificant. Our findings are robust with different definitions of the key variables; they also provide important implications for international risk diversification: as financial-market conditions (measured by the TED spread and FXV) deteriorate, the links between stock-market returns, correlations, and volatilities appear to be strengthened.

Keywords: Correlations; Market volatilities; US financial crisis; TED spread; Stock-market volatility index; Foreign-exchange market volatility index (search for similar items in EconPapers)
JEL-codes: C32 F31 G15 (search for similar items in EconPapers)
Date: 2016
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (9)

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S0264999316301791
Full text for ScienceDirect subscribers only

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:eee:ecmode:v:59:y:2016:i:c:p:9-22

DOI: 10.1016/j.econmod.2016.06.016

Access Statistics for this article

Economic Modelling is currently edited by S. Hall and P. Pauly

More articles in Economic Modelling from Elsevier
Bibliographic data for series maintained by Catherine Liu ().