Identification of Global and Local Shocks in International Financial Markets via General Dynamic Factor Models

Matteo Barigozzi, Marc Hallin and Stefano Soccorsi

Journal of Financial Econometrics, 2019, vol. 17, issue 3, 462-494

Abstract: We employ a two-stage general dynamic factor model to analyze co-movements between returns and between volatilities of stocks from the U.S., European, and Japanese financial markets. We find two common shocks driving the dynamics of volatilities—one global shock and one United States–European shock—and four local shocks driving returns, but no global one. Co-movements in returns and volatilities increased considerably in the period 2007–2012 associated with the Great Financial Crisis and the European Sovereign Debt Crisis. We interpret this finding as the sign of a surge, during crises, of interdependencies across markets, as opposed to contagion. Finally, we introduce a new method for structural analysis in general dynamic factor models which is applied to the identification of volatility shocks via natural timing assumptions. The global shock has homogeneous dynamic effects within each individual market but more heterogeneous effects across them, and is useful for predicting aggregate realized volatilities.

Keywords: Dynamic factor models; volatility; financial crises; contagion; interdependence (search for similar items in EconPapers)
JEL-codes: C32 C38 C55 G01 G15 (search for similar items in EconPapers)
Date: 2019
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Citations: View citations in EconPapers (6)

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Working Paper: Identification of global and local shocks in international financial markets via general dynamic factor models (2019)
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