Dynamic Correlation Analysis of Asian Stock Markets
Hwang, Jae-Kwang, International Advances in Economic Research
Abstract This paper examines the stock market linkages within the Asia- Pacific region and between Asian markets and the U.S. market over the period of January 2000 to June 2010, employing the dynamic conditional correlation GARCH model. Our results show that there exist very high correlations among the stock markets during the 2008 financial crisis. Therefore, consistent with the finding in literature, there are no diversification benefits during the financial crisis. However, our results show that there are still substantial opportunities for global investors to improve the risk-return performance between China and other markets during the sample period. In addition, we find evidence that the U.S. market significantly affects the stock markets in the Asia-Pacific region. Using T-GARCH model, there is a strong evidence of an asymmetric effect on conditional variance except stock markets in China and Malaysia.
Keywords Stock market correlation . DCC model . T-GARCH The 2008 financial crisis
There are many empirical studies on the linkages and direction of information flow among the stock markets around the globe (Forbes and Rigobon 2002; Syriopoulos 2007; Gilmore et al. 2008; Bekaert et al. 2009; You and Daigler 2010). It is well documented that there are stronger financial co-movements among the stock markets around the world. That is mainly due to the globalization process, abolishment of the restrictions in capital movements, and the improvement of telecommunications skills.
Capital market integration or contagion has been one of the important issues in international finance that interest both international investors and policymakers. In fact, knowing the level of market integration allows investors to improve their portfolio performance through diversification with less correlated assets, and helps the policymakers to plan adequate policies for internal capital markets in the event of global economic and financial crisis.
Turgutlu and Ucer (2010) reported that most of the emerging markets have a significant dependence with the U.S. stock markets and international stock markets are significantly interdependent, which leaves a smaller chance to benefit from international portfolio diversification. Gklezakou and Mylonakis (2010) examined ten global stock markets to figure out the effect of economic crisis on the stock markets. They showed the empirical findings that the recent economic crisis increased their correlation, thus tightening the existing links. Arouri and Nguyen (2009) studied the time-varying features of stock market correlations in the Gulf area. There is an insignificant correlation between the Gulf stock markets and the world market, thus there is still room for international investors to get the benefit from international diversification in Gulf markets. Huang (2007) studied the country-level evidence of global pricing for nine developed countries from 1980 to 2004. He showed that large-cap stocks have significant co-movements across countries, but small-cap stocks do not have significant correlations.
This study investigates whether linkages exist among stock markets of Australia, China, Hong-Kong, Japan, Korea, Malaysia, New Zealand, Singapore, Taiwan, and the U.S. by using weekly data. The U.S. market is selected because it has long been seen as the leader of the global financial markets. This study covers the most recent period of January 2000 to June 2010 using weekly data and investigates the following hypotheses. First, is there co-movement between Asian markets and U.S. markets? Are stock market correlations time- varying? Second, how do the returns of the U.S. market influence over the returns of the Asian markets? Third, do good news and bad news have different impacts on predicting future volatility? This paper employs simple correlation coefficients, the DCC model, and the GARCH model to answer the questions. …