Time-Frequency Wavelet Analysis of Stock Market Co-Movement between and within Geographic Trading Blocs

Posted: 31 Aug 2017

See all articles by Bilel Kaffel

Bilel Kaffel

University of Sfax - Higher Institute of Business Administration; University of Sfax - Higher Institute of Business Administration

Fathi Abid

University of Sfax, Faculty of Economic and Management Sciences, Probability & Statistics Laboratory

Date Written: August 29, 2017

Abstract

In the context of globalization, through a growing process of market liberalization, advanced technology and economic trading bloc, national stock markets have become more interdependent, which limits the international portfolio diversification opportunities. This paper investigates the degree of stock market co-movement between and within thirteen developed European Union markets, six developing Latin American markets, two developed North American markets, ten developing Asian markets, Norway, Switzerland, Australia and Japan markets. The research methodology employed includes wavelet coherence, wavelet correlation and cross-correlation and wavelet multiple cross-correlation. Results show a positive correlation across intra and inter trading blocs in all investment horizons and over time, and they show that the linkage between stock returns increases with the time scale, implying that the international diversification benefits have largely disappeared in globalized world markets. Moreover, we found a high degree of co-movement at low frequencies in crisis and no crisis periods, which indicates a fundamental theoretical relationship between stock market returns. Finally, multiple cross-correlation analysis reveals a lead/lag relationship which provides information to international investors to manage their investment portfolios facing sudden changes, and it reveals that Frances' stock market is able to pull the other major world stock markets at lower and high frequencies.

Keywords: international stock market linkage, wavelet coherence, wavelet correlation, wavelet cross-correlation, wavelet multiple cross-correlation

JEL Classification: C40, E32, F30, F36, G15

Suggested Citation

Kaffel, Bilel and Abid, Fathi, Time-Frequency Wavelet Analysis of Stock Market Co-Movement between and within Geographic Trading Blocs (August 29, 2017). Available at SSRN: https://ssrn.com/abstract=3028776

Bilel Kaffel (Contact Author)

University of Sfax - Higher Institute of Business Administration ( email )

BP 1013

University of Sfax - Higher Institute of Business Administration ( email )

BP 1013

Fathi Abid

University of Sfax, Faculty of Economic and Management Sciences, Probability & Statistics Laboratory ( email )

Road of Airport, Km 4
Sfax, sfax 3018
Tunisia
+216 7427 9154 (Phone)

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