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How Has the Behavior of Cross‐Market Correlations Altered During Financial and Debt Crises?
Author(s) -
Demiralay Sercan,
Ulusoy Veysel
Publication year - 2017
Publication title -
the manchester school
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.361
H-Index - 42
eISSN - 1467-9957
pISSN - 1463-6786
DOI - 10.1111/manc.12171
Subject(s) - economics , equity (law) , emerging markets , financial contagion , sovereign debt , financial crisis , monetary economics , econometrics , financial market , correlation , financial economics , sovereignty , finance , macroeconomics , politics , political science , law , geometry , mathematics
In this paper, we analyze the time‐varying behavior of cross‐market correlations between emerging and developed markets. For this, we conduct the Asymmetric Dynamic Conditional Correlation ‐EGARCH model, which captures asymmetries both in the conditional variances and correlations. Our main results suggest the upward patterns of correlations, reflecting the increased equity market integration over time, and also provide that asymmetric behavior in the correlations is not as common as in the volatilities. We further analyze time‐paths of the correlations during the two latest crises; namely global financial crisis (GFC) and European Sovereign Debt Crisis to investigate whether the crises induce contagion effects and significant structural shifts. The empirical findings reveal that the correlation levels significantly increase and the emerging markets recouple in the latest two turmoil episodes, providing evidence of contagion incidences. Moreover, we examine whether the dynamic correlations possess abrupt changes in times of the crisis via multiple structural breakpoint tests and demonstrate that substantial regime shifts in the conditional correlations are present during both the GFC and the ESDC. Our results provide insights and have potential implications for global investors to optimize their portfolios as well as for authorities to handle contagion risk and prevent its adverse impacts.