Correlation Dynamics in the G7 Stock Markets

29 Pages Posted: 7 Nov 2016

See all articles by Anita Suurlaht

Anita Suurlaht

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

Date Written: November 6, 2016

Abstract

The present study explores the trend of the correlation level within the synchronised returns on the G7 equity market indices over the 1991-2015 sample period and its response to changing economic environment. Empirical results show a strong positive trend toward higher correlation level and significant time-series autocorrelation in the magnitude of cross-market return correlation. Correlation level is higher when financial markets experience turbulent periods. The sample period is split into “pre-crisis” and “crisis” periods to allow for different risk dynamics in two states of economy. During the “pre-crisis” period equity markets appear to be more correlated when the countries in the G7 group experience decrease in average GDP level. During the “crisis” period this relationship reverses; the growth in average GDP level is associated with a higher level of correlation within the equity markets.

Keywords: Dynamic conditional correlation, Multivariate GARCH, G7 stock market integration

JEL Classification: C51, C58, G15

Suggested Citation

Suurlaht, Anita, Correlation Dynamics in the G7 Stock Markets (November 6, 2016). Available at SSRN: https://ssrn.com/abstract=2865321 or http://dx.doi.org/10.2139/ssrn.2865321

Anita Suurlaht (Contact Author)

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

Blackrock, Co. Dublin
Ireland

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