Measuring financial interdependence in asset markets with an application to eurozone equities

Renee Fry-McKibbin, Cody Yu-Ling Hsiao and Vance Martin

Journal of Banking & Finance, 2021, vol. 122, issue C

Abstract: A general measure of asset market interdependence based on higher order comoments is developed and applied to studying weekly U.S. and eurozone equity returns from 1990 to 2017. A new test of independence is also developed. The empirical results show that interdependence peaks during the global financial crisis with the covariance and covolatility comoments being the dominant factors. Conditioning the interdependence measure on volatility does not change the overall qualitative results. Implications of the results for constructing diversified portfolios reveal economic benefits from portfolios based on higher order comoments than the usual assumption of bivariate normality, especially during the GFC. The empirical results also provide evidence that European Union membership led to higher interdependence than did the adoption of the common currency.

Keywords: Entropy; Generalized distributions; Comoment decomposition; Testing; Contagion; Portfolio diversification (search for similar items in EconPapers)
JEL-codes: C12 F30 (search for similar items in EconPapers)
Date: 2021
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (11)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jbfina:v:122:y:2021:i:c:s0378426620302478

DOI: 10.1016/j.jbankfin.2020.105985

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