Dynamic Stock Market Covariances in the Eurozone

30 Pages Posted: 8 Jun 2012 Last revised: 10 Jun 2012

Gregory Connor

National University of Ireland, Maynooth (NUI Maynooth) - Department of Economics

Anita Suurlaht

University College Dublin (UCD) - Department of Banking & Finance

Date Written: June 7, 2012

Abstract

This paper examines the short-term dynamics, macroeconomic sensitivities, and longer-term trends in the variances and covariances of national equity market index daily returns for eleven countries in the Euro currency zone. We modify Colacito, Engle and Ghysel's Mixed Data Sampling Dynamic Conditional Correlation Garch model to include a new scalar measure for the degree of correlatedness in time-varying correlation matrices. We also explore the robustness of the findings with a less model-dependent realized covariance estimator. We find a secular trend toward higher correlation during our sample period, and significant linkages between macroeconomic and market-wide variables and dynamic correlation. One notable finding is that average correlation between these markets is lower when their average GDP growth rate is lower or when more of them have negative GDP growth.

Keywords: dynamic conditional correlation, multivariate GARCH, international stock market integration, European Monetary Union

JEL Classification: C51, C58, G15

Suggested Citation

Connor, Gregory and Suurlaht, Anita, Dynamic Stock Market Covariances in the Eurozone (June 7, 2012). Available at SSRN: https://ssrn.com/abstract=2079653 or http://dx.doi.org/10.2139/ssrn.2079653

Gregory Connor (Contact Author)

National University of Ireland, Maynooth (NUI Maynooth) - Department of Economics ( email )

County Kildare
Ireland

Anita Suurlaht

University College Dublin (UCD) - Department of Banking & Finance ( email )

Blackrock, Co. Dublin
Ireland

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