What drives cross-market correlations during the United States Q.E.?

Pick Schen Yip, Robert Brooks, Hung Do and Xuan Vinh Vo

International Review of Financial Analysis, 2022, vol. 83, issue C

Abstract: This paper investigates the dynamic cross-market correlations and its crucial drivers between the United States (U.S.) stock and currency market and foreign markets during the U.S. Quantitative Easing (QE) periods. We focus on countries with strong trade and financial linkages with the U.S., including Australia, Canada, and Mexico. Our empirical analyses deliver important findings. First, we consistently find positive (negative) correlations between the U.S. equity (currency) market and financial assets of the three foreign countries under the scenario of the U.S. QE. Second, the magnitude of the conditional correlations tends to be strengthened during the initiation of the U.S. QE1 but was weakened during the U.S. QE3. Lastly, we find that U.S. treasury yields and term premium were among the most significant economic drivers of the markets' linkages during both QE1 and QE3 but in an opposite role. Meanwhile, the expected uncertainty in the bond market additionally contributed to drive the markets' interrelationship during the QE2. Our findings deliver important information to investors and policymakers to anticipate the dynamics of market linkages under U.S. QE scenarios.

Keywords: Quantitative easing; Cross-market correlation; DCC-GARCH; Dynamic spillovers (search for similar items in EconPapers)
JEL-codes: C32 C5 E52 F31 G15 O16 (search for similar items in EconPapers)
Date: 2022
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Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:finana:v:83:y:2022:i:c:s1057521922002721

DOI: 10.1016/j.irfa.2022.102320

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