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Quantile dependence between developed and emerging stock markets aftermath of the global financial crisis
United Arab Emirates Univ, U Arab Emirates.
Univ Newcastle, Australia.
Euromonitor Int Eastern Europe, Lithuania.
Linköping University, Department of Management and Engineering, Economics. Linköping University, Faculty of Arts and Sciences.
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2018 (English)In: International Review of Financial Analysis, ISSN 1057-5219, E-ISSN 1873-8079, Vol. 59, p. 179-211Article in journal (Refereed) Published
Abstract [en]

This paper examines the cross-quantile dependence between developed and emerging market stock returns and investigates its time-varying characteristics, using recursive sample estimations. The results based on cross-quantilogram approach reveal a heterogeneous quantile relation for the USA, UK, German, and Japanese stock returns to those of the emerging markets. Systematic risk generally does not explain the cross-country dependence structure, since it remains essentially unchanged when controlling for financial, geopolitical, and economic uncertainties. Moreover, the cross-quantile correlation changes over time, especially in the low and high quantiles, indicating that it is prone to jumps and discontinuities, even in a seemingly stable dependence structure. These results are important for institutional investors and market observers.

Place, publisher, year, edition, pages
ELSEVIER SCIENCE INC , 2018. Vol. 59, p. 179-211
Keywords [en]
Cross-quantilogram; Directional predictability; Developed market; Emerging market; Uncertainty
National Category
Economics
Identifiers
URN: urn:nbn:se:liu:diva-151631DOI: 10.1016/j.irfa.2018.08.005ISI: 000444513600013OAI: oai:DiVA.org:liu-151631DiVA, id: diva2:1251755
Note

Funding Agencies|UAEU UPAR Grant [G00001895]; Jan Wallander and Tom Hedelius Foundation

Available from: 2018-09-27 Created: 2018-09-27 Last updated: 2023-02-02
In thesis
1. Empirical Studies on Economic and Financial Spillovers: Asymmetric Risk and Dependence Modeling
Open this publication in new window or tab >>Empirical Studies on Economic and Financial Spillovers: Asymmetric Risk and Dependence Modeling
2023 (English)Doctoral thesis, comprehensive summary (Other academic)
Alternative title[sv]
Empiriska studier om ekonomiska och finansiella spillovers : Assymetrisk risk och påverkans modellering
Abstract [en]

Financial assets are volatile, and volatility becomes more intense in terms of size and rate of recurrence when markets are uncertain and growing rapidly. The fact that the recurrence rate increased during crisis periods, such as the IT bubble in the early 2000 and the global financial crisis that started in 2007, is a key finding in the literature. Estimating these results requires modeling a time series that can consider volatility clustering. However, the prominent model in finance and economics estimates that the average volatility increases when uncertainty increases. This modeling process needs to consider the asymmetry that financial assets and economic outcomes, such as gross domestic product (GDP) exhibit, which tend to fall drastically in a short period and increase steadily over a long period. To model these different behaviors, one must consider the asymmetric nature of the return, for example, when a stock has extremely low or extremely high returns in a day. 

To model this behavior, I used several methods in settings that could better explain what happens during market periods when there is higher uncertainty. The general finding is that correlations are higher when returns are in the lower quantiles, called the left tails. Thus, financial assets are positively correlated, especially during periods of increased uncertainty. It is not only clustering that one would try to explain, but another issue is the prediction of one asset’s effect on another. The effect of one asset on another asset is called the spillover effect. We tried to distinguish between events that happen during the same time that affect all assets. These events are called systematic risk, and the effects that one asset has on another asset is called systemic risk. Explaining the systemic risk typically has higher priority from a policy perspective, as systemic risk can be a driver for risk transmission from one asset to another, creating a chain of risk or a spiral of risk. Hence, the approaches I used can model that chain of risk and predict risk transmission while controlling for external factors that increase uncertainty. The results of this research show the connection between energy assets and renewable energy stocks in Papers 1 and 2. For instance, we found that there is a possibility of adjusting the European carbon emission cap and that renewable energy stocks positively correlate with energy commodities in the tails. Thus, renewable energy stocks follow a macroeconomic cycle. The findings of Paper 3 show the systemic and systematic nature of cross-country spillovers between emerging and developed financial markets, and that the spillover is time-varying with increasing spillovers in crisis periods. Paper 4 examines the Nordic banking sector. The results show that banks’ spillover to their local markets is due to their systemic importance and the strength of the spillover is related to the bank’s characteristics. In the final Paper, I studied the upside and downside movement asymmetry of stocks and found that betting on upside volatility is better than a portfolio perspective but comes at the cost of increased pricing errors. The empirical findings of this thesis significantly contribute to policymakers and institutional investors in portfolio diversification and risk management. 

Place, publisher, year, edition, pages
Linköping: Linköping University Electronic Press, 2023. p. 13
Series
Linköping Studies in Arts and Sciences, ISSN 0282-9800 ; 849
Keywords
Spillovers, systemic risk, risk modeling, risk dependence, asymmetric risk, energy finance  , Spillovers, systemisk risk, riskmodellering, risk påverkan, asymmetrisk risk, energifinans
National Category
Economics
Identifiers
urn:nbn:se:liu:diva-191593 (URN)10.3384/9789180750653 (DOI)9789180750646 (ISBN)9789180750653 (ISBN)
Public defence
2023-02-24, ACAS, A-huset, Campus Valla, Linköping, 13:00
Opponent
Supervisors
Available from: 2023-02-02 Created: 2023-02-02 Last updated: 2023-02-02Bibliographically approved

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