Cross country co-movement in equity markets after the US financial crisis

Abstract

Purpose This paper aims to attempt to capture the co-movement of the Indian equity market with some of the major economic giants such as the USA, Europe, Japan and China after the occurrence of global financial crisis in a multivariate framework. Apart from these cross-country co-movements, the study also captures an intertemporal risk-return relationship in the Indian equity market, considering the covariance of the Indian equity market with the other countries as well. Design/methodology/approach To account for dynamic correlation coefficients and risk-return dynamics, vector autoregressive (1) dynamic conditional correlation–asymmetric generalized autoregressive conditional heteroskedastic model in a multivariate framework and exponential generalized autoregressive conditional heteroskedastic model in mean with covariances as explanatory variables are used. For an in-depth analysis, Markov regime switching model and optimal hedging ratios and weights are also computed. The span of data ranges from August 10, 2010 to August 7, 2015, especially after the global financial crisis. Findings The Indian equity market is not completely decoupled from mature markets as well as emerging market (China), but the time-varying correlation coefficients are on a downward spree after the global financial crisis, except for the US market. The Indian and Chinese equity markets witness a highest level of correlation with each other, followed by the European, US and Japanese markets. Both the optimal portfolio hedge ratios and portfolio weights with two asset classes point out toward portfolio risk minimization through the combination of the Indian and US equity market stocks from a US investor viewpoint. A negative co-movement between the Indian and US market increases the conditional expected returns in the Indian equity market. There is an insignificant but a negative relationship between the expected risk and returns. Practical implications The study provides an insight to the international as well as domestic investors and supports the construction of cross-country portfolios and risk management especially after the occurrence of global financial crisis. Originality/value The present study contributes to the literature in three senses. First, the period relates to the events after the global financial crisis (2007-2009). Second, the study examines the co-movement of the Indian equity market with four major economic giants such as the USA, Europe, Japan and China in a multivariate framework. These economic giants are excessively following the easy money policies aftermath the financial crisis so as to wriggle out of deflationary phases. Finally, the study captures risk-return relationship in the Indian equity market, considering its covariance with the international markets.

Inter-linkages Among Selected Stock Markets of South Asia: Revisit

“…Granger Causality test has been used by many researchers in their studies to find the cause and effect relationship among different stock markets such as Wong et al (2004), Tripathi and Sethi (2010), Iqbal et al (2011), Roa (2014 and Seth and Sharma (2015). Wang et al (2003), Chuang et al (2007), Sharma and Bodla (2011) and Singh and Singh (2016) apply the VAR model to conduct their research. As most of the studies used only one or two methods in their studies but in current study the author used more than two econometric methods to achieve the objectives of the study.…”

Co-movement among US, Frontier and BRIC Equity Markets after the Financial Crisis

“…On methodological front, the researchers have used wide variety of models, such as ARCH models, dynamic conditional correlations, Markov-switching model and copula approach, over a period of time. Moreover, the empirical models capturing correlation in the second moments (volatility) of the stock markets are found to be more efficient in comparison to the models working on the first moments (returns) (Singh & Singh, 2016; Syriopoulos, Makram, & Boubaker, 2015). So, the present study also employs asymmetric DCC-MVGARCH (1,1) model in a multivariate framework to account for short-run time-varying co-movement among the markets (supported by literature) and Johansen cointegration model to account for long-run stochastic trends among the markets undertaken.…”

Information Content in International Equity Volatility on Yuan�s Depreciation

“…In order to enhance or at least maintain the value of their equity portfolios, investing community needs to be well versed with the effects of one financial market (forex) of a nation on the other financial markets (equity markets) of different nations, at least in the same region. There is a large body of literature investigating the return-volatility transmission or spillover effects between the equity markets across different countries for instance, Bhar & Nikolova 2 , Bianconi et al 3 , Bekirosv 1 , Evgenii & Elena 11 , Lehkonen & Heimonen 17 and Syriopoulos et al 23 , Singh & Singh 22 and so on).…”