Co-Movements of US and Asian Equity Markets: Evidence from Asymmetric and Time-Varying Coefficients

Bharat Kolluri (), Susan Machuga () and Mahmoud Wahab ()
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Bharat Kolluri: University of Hartford, US
Susan Machuga: University of Hartford, US
Mahmoud Wahab: Economics and Finance, University of Hartford, 200 Bloomfield Avenue, West Hartford, Connecticut 06117, US

Review of Pacific Basin Financial Markets and Policies (RPBFMP), 2014, vol. 17, issue 04, 1-44

Abstract: We examine co-movements of nine Asian equity markets with both the US and Japan with special interest in distinguishing co-movements during periods of positive returns from those during periods of negative returns. A discrete asymmetric piecewise linear conditional mean returns specification is adopted to generate asymmetric co-movement parameters for periods of positive and negative returns. Conditional heteroskedasticity is modeled using GARCH and EGARCH specifications. Predicted conditional volatilities are used to generate alternative estimates of asymmetric and time-varying co-movement parameters. Conditional mean returns from asymmetric and symmetric conditional mean return models along with GARCH and EGARCH volatilities are used to generate estimates of asymmetric and symmetric conditional (ex-ante) Sharpe ratios. Asian markets returns and volatilities show a clear tendency to move more with the US than with Japan; and their co-movements with negative US returns far exceed their co-movements with positive US returns, thereby suggesting that any diversification benefits into Asian equities are likely to manifest themselves more during periods of positive than negative US returns. Conditional asymmetric Sharpe ratios exceed conditional symmetric Sharpe ratios; however, and more importantly, performance-ranking differs depending on whether asymmetric versus symmetric conditional Sharpe ratios are used. Asymmetric conditional Sharpe ratios suggest that India (followed by Malaysia) offers the best return/risk tradeoff, with the least favorable market is South Korea (using GARCH) and Philippines (using EGARCH).

Keywords: Conditional Sharpe Ratios; EGARCH Modeling; Error Correction Model; Co-movements of Asian Equity Markets; Asymmetry (search for similar items in EconPapers)
JEL-codes: G1 G2 G3 (search for similar items in EconPapers)
Date: 2014
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Citations: View citations in EconPapers (2)

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DOI: 10.1142/S0219091514500210

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