Comovement in International Equity Markets: A Sectoral View
28 Pages Posted: 9 Nov 2003
Date Written: October 2003
We investigate shifts in correlation patterns among international equity returns at the market level as well as the industry level. We develop a novel bivariate GARCH model for equity returns with a smoothly time-varying correlation and then derive a Lagrange Multiplier statistic to test the constant-correlation hypothesis directly. Applying the test to weekly data from Germany, Japan, the UK and the US in the period 1980-2000, we find that correlations among the German, UK and US stock markets have doubled, whereas Japanese correlations have remained the same. Both dates of change and speeds of adjustment vary widely across countries and sectors.
Keywords: stock market linkages, financial integratiom, smooth transition, spillovers
JEL Classification: C22, G15
Suggested Citation: Suggested Citation