Correlation Dynamics in the G7 Stock Markets
29 Pages Posted: 7 Nov 2016
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
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