Correlation dynamics between Asia-Pacific, EU and US stock returns

Stuart Hyde, Don Bredin and Nghia Nguyen

MPRA Paper from University Library of Munich, Germany

Abstract: This paper investigates the correlation dynamics in the equity markets of 13 Asia-Pacific countries, Europe and the US using the asymmetric dynamic conditional correlation GARCH model (AG-DCC-GARCH) introduced by Cappiello, Engle and Sheppard (2006). We find significant variation in correlation between markets through time. Stocks exhibit asymmetries in conditional correlations in addition to conditional volatility. Yet asymmetry is less apparent in less integrated markets. The Asian crisis acts as a structural break, with correlations increasing markedly between crisis countries during this period though the bear market in the early 2000s is a more significant event for correlations with developed markets. Our findings also provide further evidence consistent with increasing global market integration. The documented asymmetries and correlation dynamics have important implications for international portfolio diversification and asset allocation.

Keywords: dynamic conditional correlation; asymmetry; international portfolio diversification (search for similar items in EconPapers)
JEL-codes: C32 F3 G15 (search for similar items in EconPapers)
Date: 2007-05
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Citations: View citations in EconPapers (20)

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Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:9681

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