Identification of Global and National Shocks in International Financial Markets via General Dynamic Factor Models

45 Pages Posted: 20 Mar 2017  

Matteo Barigozzi

London School of Economics and Political Science

Marc Hallin

ECARES, Universite Libre de Bruxelles

Stefano Soccorsi

Université Libre de Bruxelles (ULB) - European Center for Advanced Research in Economics and Statistics (ECARES)

Date Written: March 18, 2017

Abstract

We employ a two-stage general dynamic factor model method to analyse the co-movements between returns and between volatilities of stocks belonging to the US, European, and Japanese financial markets. We find evidence of two common shocks driving the dynamics of volatilities - one global (worldwide) shock and one US-European shock - and four "national" shocks in the panel of returns, but no global one. Co-movements in the returns and volatilities panels increased considerably in the period 2007-2012 associated with the Great Financial Crisis and the European Sovereign Debt Crisis. We interpret this finding as the sign of a surge, during crises, of interdependencies across markets, as opposed to contagion. Finally, we show that the global volatility shock, identified via natural timing assumptions, has homogeneous dynamic effects within each individual market but more heterogeneous effects across them, and also has good predictive power on aggregate realised volatilities.

Keywords: Dynamic factor models, volatility, financial crises, contagion, interdependence

JEL Classification: C32, C55, C38, G01, G15

Suggested Citation

Barigozzi, Matteo and Hallin, Marc and Soccorsi, Stefano, Identification of Global and National Shocks in International Financial Markets via General Dynamic Factor Models (March 18, 2017). Available at SSRN: https://ssrn.com/abstract=2937243 or http://dx.doi.org/10.2139/ssrn.2937243

Matteo Barigozzi (Contact Author)

London School of Economics and Political Science ( email )

Houghton Street
London, England WC2A 2AE
United Kingdom

Marc Hallin

ECARES, Universite Libre de Bruxelles ( email )

Ave. Franklin D Roosevelt, 50 - C.P. 114
Brussels, B-1050
Belgium
+32 2 650 5886 (Phone)
+32 2 650 5899 (Fax)

Stefano Soccorsi

Université Libre de Bruxelles (ULB) - European Center for Advanced Research in Economics and Statistics (ECARES) ( email )

Ave. Franklin D Roosevelt, 50 - C.P. 114
Brussels, B-1050
Belgium

Paper statistics

Downloads
48
Abstract Views
208