This article investigates the dynamics of correlation between 11 Asian stock markets and the US stock market. By utilizing the method of 'principal components', we identify a single latent factor that can explain a major portion of variation in the weekly returns of these 11 markets from 1993 to early 2009. We employ the asymmetric Dynamic Conditional Correlation (DCC) model to estimate the correlation between this Asian factor and the US stock market. We find that there is a mean shift in the estimated DCC in the period from late of 2007. We refer this finding as contagion from the US to the Asian markets. However, we find no such evidence of having contagion between the US and individual markets in Asia during the Asian financial crisis.
This study extends the empirical model of incomplete risk sharing developed by Crucini () by allowing unequal income pooling and explores the implications of using an alternative measure for aggregate risk. Based on samples from Canadian provinces, G‐7, and OECD countries spanning the years 1961–2008, we show that the empirical procedure used by Crucini tends to overstate the average degree of risk sharing and understate the dispersion of risk sharing, when compared to our unequal income pooling model. The empirical results from our unequal pooling model show that (i) the degree and dispersion of risk sharing across Canadian provinces, G‐7 countries, and OECD countries remain stable over time; (ii) the degree of risk sharing across Canadian provinces is higher than that across the G‐7 and OECD countries; and (iii) the degree of risk sharing seems positively related to equity and trade diversification.
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