Dynamic correlation and equicorrelation analysis of global financial turmoil: evidence from emerging East Asian stock markets

Financial Crises, Macroeconomic Variables, and Long-Run Risk: An Econometric Analysis of Stock Returns Correlations (2000 to 2019)

“…The empirical investigation relies on a standard regression approach with crisis dummies (see, e.g., Syllignakis and Kouretas (2011) and Cai et al (2016) as regards bilateral stock returns correlation; moreover, see, e.g., Chkili (2016) and Kang et al (2016) as regards correlations between stocks and "safe-haven" asset returns). More formally, denoting with ρ i,j,t the time-varying returns correlation between asset (i) and asset (j) at time t, the following regression is estimated for each pairwise conditional correlation:…”

“…Although the choice of these variables reflects the main issues addressed in the paper, this set of macro-variables is highly restricted. The use of the Sovereign CDS spread, the TED spread and the VIX volatility index is quite common in subsequent work focusing on dynamic correlations between emerging economies and US stock market returns (Hwang et al 2013;Cai et al 2016). While this variable selection approach is more inclusive, other important financial variables, such as the world equity risk premium or the European Central Bank (ECB) systemic stress composite indicator, have been neglected in the literature.…”

On the Performances of Dynamic Conditional Correlation Models in the Sovereign CDS Market and the Corresponding Bond Market

“…Engle and Kelly (2012) also propose a time-varying correlation model considering more financial data specifications known as a dynamic equicorrelation model (DECO). In fact, the DCC-DECO model assumes that whenever the time is, correlations' pairwise across markets are equals basing on an arbitrary estimation of the covariance matrix (Engle and Kelly, 2012;Cai et al, 2016) 3 .…”

“…Based on the aforementioned considerations, DCC models constitute a reliable tool for estimating interconnections between several assets, markets and/or countries. It is obvious thus, that this class of model is used in previous research to investigate financial phenomena: contagion, risk spillover (Lee, 2006;Cai et al, 2016) or co-movement (Coudert and Gex, 2010), given the considerable number of reasons why correlation is an important variable in financial and economic studies.…”

“…Authors show that even though this new class of model allows a better capture of the slight skewness and the high kurtosis characterizing stock returns, it doesn't outperform the standard normal-distributed DCC model. Moreover, Cai et al (2016) compare the estimators' accuracy of the dynamic conditional correlation and the dynamic equicorrelation (DECO) 7 MGARCH on 9 stock markets from East Asia nd the USA during the Global financial crisis. Results of the DECO model are consistent and confirms those of the standard DCC.…”