Stock market correlations during the financial crisis of 2008–2009: Evidence from 50 equity markets |
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| Institution: | 1. John Molson School of Business, Concordia University, 1455 De Maisonneuve Blvd West, Montreal, Quebec H3G 1M8, Canada;2. School of Economics, Henan University, No. 85 Minlun Street, Kaifeng, Henan Province, P.R. China;1. School of Business, Economics and Information Systems, University of Passau Innstrasse 27, 94030 Passau, Germany;2. School of Business and Law, Edith Cowan University, 270 Joondalup Drive, Perth 6027, Australia;1. Department of Finance and Investment, College of Economics and Administrative Sciences, Al Imam Mohammad Ibn Saud Islamic University (IMSIU), P.O Box 5701, Riyadh, Saudi Arabia;2. Department of Finance and Accounting, University of Tunis El Manar, B.P. 248, C.P. 2092 Tunis Cedex, Tunisia;3. Lebow College of Business, Drexel University, Philadelphia, PA 19104-2875, United States;4. IPAG Lab, IPAG Business School, France;5. Department of Business Administration, Pusan National University, Busan 609-735, Republic of Korea |
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| Abstract: | Using data from 50 equity markets we examine conditional and unconditional correlations around two major banking events during the financial crisis of 2008–09. To measure the value of covariance information on the augmented DCC model used in the study, a portfolio in-sample estimation is performed. We show that by taking into account the change in the level of variance in high volatility periods, the estimates of the conditional covariance are more efficient in capturing the dynamics of the stock markets variance. Furthermore, in a two-asset allocation framework, the model consistently generates relatively low portfolio variances, implying substantial benefits in portfolio diversification. |
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