Correlation Dynamics between Asia-Pacific, EU and US Stock Returns

34 Pages Posted: 8 Feb 2008

See all articles by Stuart Hyde

Stuart Hyde

Alliance Manchester Business School - University of Manchester

Nghia Trong Nguyen

Manchester Business School

Don Bredin

University College Dublin (UCD) - Department of Banking & Finance

Date Written: May 2007

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

JEL Classification: C32, F3, G15

Suggested Citation

Hyde, Stuart and Nguyen, Nghia Trong and Bredin, Don, Correlation Dynamics between Asia-Pacific, EU and US Stock Returns (May 2007). Available at SSRN: https://ssrn.com/abstract=1090524 or http://dx.doi.org/10.2139/ssrn.1090524

Stuart Hyde (Contact Author)

Alliance Manchester Business School - University of Manchester ( email )

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Nghia Trong Nguyen

Manchester Business School ( email )

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+44(0)1612754023 (Fax)

Don Bredin

University College Dublin (UCD) - Department of Banking & Finance ( email )

School of Business
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Ireland

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