TY - JOUR
T1 - Dynamic correlation and equicorrelation analysis of global financial turmoil
T2 - evidence from emerging East Asian stock markets
AU - Cai, Xiao Jing
AU - Tian, Shuairu
AU - Hamori, Shigeyuki
N1 - Funding Information:
This work was supported by the Japan Society for the Promotion of Science KAKENHI [grant number 25380267].
Publisher Copyright:
© 2016 Taylor & Francis.
PY - 2016/8/26
Y1 - 2016/8/26
N2 - This study investigates the dynamic conditional correlations (DCCs) between eight emerging East Asian stock markets and the US stock market and analyses the dynamic equicorrelation among these nine stock markets. We find a significant increase in the conditional correlations and equicorrelation in the first phase of the global financial crisis. We refer to this finding as contagion from the US stock market to the emerging East Asian markets. We also find an additional significant process of increasing correlations and equicorrelation (herding) in the second phase of the global financial crisis. Further, we employ two new models, namely DCCX-MGARCH (a DCC Multivariate GARCH model with exogenous variables) and DECOX-MGARCH (a dynamic equicorrelation multivariate GARCH model with exogenous variables), to identify the channels of contagion. We find that an increase in the VIX Index increases the conditional correlations and equicorrelation, while increases in TED spreads decrease the conditional correlations of six emerging East Asian countries with the USA. We compare the accuracy of the conditional correlation estimates of the DCC and DCCX models (or DECO and DECOX models) by constructing a loss function. We find that the DCCX (DECOX) model provides more accurate conditional correlation estimates than the DCC (DECO) model by extracting additional information from exogenous variables.
AB - This study investigates the dynamic conditional correlations (DCCs) between eight emerging East Asian stock markets and the US stock market and analyses the dynamic equicorrelation among these nine stock markets. We find a significant increase in the conditional correlations and equicorrelation in the first phase of the global financial crisis. We refer to this finding as contagion from the US stock market to the emerging East Asian markets. We also find an additional significant process of increasing correlations and equicorrelation (herding) in the second phase of the global financial crisis. Further, we employ two new models, namely DCCX-MGARCH (a DCC Multivariate GARCH model with exogenous variables) and DECOX-MGARCH (a dynamic equicorrelation multivariate GARCH model with exogenous variables), to identify the channels of contagion. We find that an increase in the VIX Index increases the conditional correlations and equicorrelation, while increases in TED spreads decrease the conditional correlations of six emerging East Asian countries with the USA. We compare the accuracy of the conditional correlation estimates of the DCC and DCCX models (or DECO and DECOX models) by constructing a loss function. We find that the DCCX (DECOX) model provides more accurate conditional correlation estimates than the DCC (DECO) model by extracting additional information from exogenous variables.
KW - DCC-MGARCH model
KW - DECO-MGARCH model
KW - emerging East Asian stock markets
KW - financial market contagion
KW - global financial crisis
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U2 - 10.1080/00036846.2016.1145349
DO - 10.1080/00036846.2016.1145349
M3 - Article
AN - SCOPUS:84961196537
VL - 48
SP - 3789
EP - 3803
JO - Applied Economics
JF - Applied Economics
SN - 0003-6846
IS - 40
ER -