Bull or bear markets: A wavelet dynamic correlation perspective

In this paper, we contribute to the literature on the international stock market co-movements and contagion, especially during the recent subprime crisis, by researching the interconnections between international stock markets in time-frequency domain.Our innovative approach consists on carrying out a wavelet decomposition of return time series before investigating the correlation dynamics across stock markets during the recent financial crisis. It thus enables us to show how the contagion dynamics between international stock market returns are changing across time scales corresponding to investors with heterogeneous time horizons. Moreover, our results reveal that the contagion dynamics depends on the bull or bear periods of stock markets, on stock markets maturity, and on regional aspects. Therefore, all these finding should be considered from an international portfolio diversification perspective.