The Effect of Global Crises on Stock Market Correlations: Evidence from Scalar Regressions via Functional Data Analysis

Sonali Das (), Riza Demirer, Rangan Gupta and Siphumlile Mangisa ()
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Siphumlile Mangisa: Department of Statistics, Nelson Mandela University, Port Elizabeth, South Africa

No 201908, Working Papers from University of Pretoria, Department of Economics

Abstract: This paper presents a novel, mixed-frequency based regression approach, derived from Functional Data Analysis (FDA), to analyze the effect of global crises on stock market correlations, using a long span of data, dating as far back as late 1800s, thus covering a wide range of global crises that have not yet been examined in the literature in this context. Focusing on the advanced nations in the G7 group, we observe heterogeneous effects of global crises on the time-varying correlations between the US stock market and its counterparts in the G7. While the post World War II period experienced a general rise in the level of correlations among developed stock market returns, we find that global crises in general have resulted in a stronger association of US stock market performance with that in the UK and Canada, whereas the opposite holds when it comes to how European and Japanese stock markets co-move with the US. Further analysis of sub-periods, however, reveals that the crises effect over stock market correlations is largely driven by the context and nature of the crises that possibly drive the perception of risk in financial markets. Overall, our results tend to suggest that in the wake of crises that are global in nature, diversification benefits will be limited by moving funds across the US and UK stock markets whereas possible diversification benefits would have been possible during the crises-ridden period of the early twentieth century by holding positions in equities in the remaining G7 nations to supplement positions in the US. However, these diversification benefits seem to have frittered away in the post World War II period, highlighting the role of emerging markets and alternative assets to improve diversification benefits in the modern era.

Keywords: Functional data analysis; global crises; stock markets; comovements; G7 (search for similar items in EconPapers)
JEL-codes: C22 G01 G15 (search for similar items in EconPapers)
Pages: 27 pages
Date: 2019-01
New Economics Papers: this item is included in nep-fmk and nep-his
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (48)

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Journal Article: The effect of global crises on stock market correlations: Evidence from scalar regressions via functional data analysis (2019)
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