Financial co-movement and correlation: evidence from 33 international stock market indices

Twm Evans, David G. McMillan
2009 International Journal of Banking, Accounting and Finance  
The analysis of financial market co-movement is an important issue for both policy makers and portfolio managers, for example, in terms of policy co-ordination and portfolio diversification. This paper presents evidence based on a data set of 33 daily international stock market indices. Initially using established cointegration and multivariate GARCH frameworks we report results that suggest correlations with the US have not in general exhibited an upward trend. The main exception to this is
more » ... ption to this is the G7 economies, although even here the correlations declined over the last two years of the sample. On a regional basis stronger evidence of rising correlations is reported, although again this evidence is not ubiquitous. Further, we then implement the recently developed non-parametric, model-free, realised variance methodology to generate monthly correlation coefficients. This method overcomes deficiencies in both the cointegration and GARCH methods. The results found at the daily level are largely confirmed by the realised correlations. Finally, we use the realised correlation coefficients to form international portfolios and compare the level of risk to that of an equally weighted portfolio. Results suggest the portfolios weighted according to the realised correlations exhibit diversification benefits over the equally weighted portfolios. Our results thus suggest that there remains room for portfolio managers to obtain diversification benefits, while policy makers may need to take in account possible adjustment costs of co-ordinated action.
doi:10.1504/ijbaaf.2009.022711 fatcat:fbfga2aujjazbpnk46yu4lbzeu