How has the behavior of cross-market correlations altered during financial and debt crises?

Demiralay, S. ORCID: 0000-0003-2543-7914 and Ulusoy, V., 2017. How has the behavior of cross-market correlations altered during financial and debt crises? The Manchester School, 85 (6), pp. 765-794. ISSN 1463-6786

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In this paper, we analyze the time‐varying behavior of cross‐market correlations between emerging and developed markets. For this, we conduct the Asymmetric Dynamic Conditional Correlation ‐EGARCH model, which captures asymmetries both in the conditional variances and correlations. Our main results suggest the upward patterns of correlations, reflecting the increased equity market integration over time, and also provide that asymmetric behavior in the correlations is not as common as in the volatilities. We further analyze time‐paths of the correlations during the two latest crises; namely global financial crisis (GFC) and European Sovereign Debt Crisis to investigate whether the crises induce contagion effects and significant structural shifts. The empirical findings reveal that the correlation levels significantly increase and the emerging markets recouple in the latest two turmoil episodes, providing evidence of contagion incidences. Moreover, we examine whether the dynamic correlations possess abrupt changes in times of the crisis via multiple structural breakpoint tests and demonstrate that substantial regime shifts in the conditional correlations are present during both the GFC and the ESDC. Our results provide insights and have potential implications for global investors to optimize their portfolios as well as for authorities to handle contagion risk and prevent its adverse impacts.

Item Type: Journal article
Publication Title: The Manchester School
Creators: Demiralay, S. and Ulusoy, V.
Publisher: Wiley
Date: December 2017
Volume: 85
Number: 6
ISSN: 1463-6786
Divisions: Schools > Nottingham Business School
Record created by: Laura Ward
Date Added: 14 May 2021 12:52
Last Modified: 14 May 2021 12:52

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