The Dark Side of Global Integration: Increasing Tail Dependence

33 Pages Posted: 25 Aug 2008 Last revised: 2 Oct 2011

See all articles by Michel A. R. Beine

Michel A. R. Beine

University of Luxemburg; CESifo (Center for Economic Studies and Ifo Institute)

Antonio Cosma

Université du Luxembourg

Robert Vermeulen

De Nederlandsche Bank

Multiple version iconThere are 2 versions of this paper

Date Written: September 24, 2008

Abstract

We measure stock market co-exeedances using the methodology of Cappiello, Gerard and Manganelli (2005, ECB Working Paper 501). This method is based on quantile regressions and enables us to measure comovement at each point of the return distribution. First, we construct an annual co-exeedance probability for the 5, 10, 25, 75, 90 and 95 percent return quantiles using daily data from 1974-2006. Next, we explain these probabilities in a panel gravity model framework. This analysis shows that macroeconomic events asymmetrically influence comovement of upper and lower tail returns. Financial liberalization has a positive impact on comovement across the return distribution, but its effect is strongest on the left tail quantiles. Trade competition weakly impact the 5%, 10% and 95% quantiles, but has a stronger influence on the other quantiles. Industrial dissimilarity has a strong effect on both tails, but not on the 25% and 75% quantiles. Exchange rate volatilities have a strong effect only on the 5% and 10% quantiles. However, the introduction of the euro has its most pronounced effect on upper quantile comovement.

Keywords: stock market comovement, trade integration, financial integration

JEL Classification: F15, F36, F41, G15

Suggested Citation

Beine, Michel A. R. and Cosma, Antonio and Vermeulen, Robert, The Dark Side of Global Integration: Increasing Tail Dependence (September 24, 2008). CREA Discussion Paper No. 2008-03; 21st Australasian Finance and Banking Conference 2008 Paper. Available at SSRN: https://ssrn.com/abstract=1253362 or http://dx.doi.org/10.2139/ssrn.1253362

Michel A. R. Beine

University of Luxemburg ( email )

L-1511 Luxembourg
Luxembourg

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

Antonio Cosma

Université du Luxembourg ( email )

162a, avenue de la Faïencerie
Luxembourg, L-1511
Luxembourg
+352 46 66 44 6763 (Phone)
+352 46 66 44 6835 (Fax)

Robert Vermeulen (Contact Author)

De Nederlandsche Bank ( email )

P.O. Box 98
1000 AB Amsterdam
Netherlands

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