Regime-Dependent Relationships Among the Stock Markets of the US, Australia, and New Zealand: A Markov Switching VAR Approach
29 Pages Posted: 6 Jun 2011
Date Written: Janunary 11, 2010
Adopting a MS-VAR model (Krolzig, 1997) and a recently developed regime-dependent impulse response analysis technique (Ehrmann, et al., 2003), this paper investigates the dynamic relationships among the stock markets of the US, Australia and New Zealand. Our results reveal the existence of two different regimes in the three stock markets. We find that the correlations among the three markets are significantly higher in a bear regime than in a bull regime. The responses of the three markets to shocks in other markets are stronger and more persistent in the bear regime than in the bull regime. Finally, our findings imply that the Australian stock market is more influential than the US stock market for the New Zealand stock market and the US stock market is more influential than the New Zealand stock market for the Australian stock market, while the Australian stock market is more influential than the New Zealand stock market for the US stock market.
Keywords: Markov Switching VAR, Regime-dependent Impulse Response, Hansen Test
JEL Classification: F36, G15, G11
Suggested Citation: Suggested Citation