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Identification of global and local shocks in international financial markets via general dynamic factor models

Barigozzi, Matteo, Hallin, Marc and Soccorsi, Stefano (2018) Identification of global and local shocks in international financial markets via general dynamic factor models. Journal of Financial Econometrics. ISSN 1479-8409

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Identification Number: 10.1093/jjfinec/nby006

Abstract

We employ a two-stage general dynamic factor model to analyze co-movements between returns and between volatilities of stocks from the US, European, and Japanese financial markets. We find two common shocks driving the dynamics of volatilities – one global shock and one US-European shock – and four local shocks driving returns, but no global one. Co-movements in returns and volatilities increased considerably in the period 2007-2012 associated with the Great Financial Crisis and the European Sovereign Debt Crisis. We interpret this finding as the sign of a surge, during crises, of interdependencies across markets, as opposed to contagion. Finally, we introduce a new method for structural analysis in general dynamic factor models which is applied to the identification of volatility shocks via natural timing assumptions. The global shock has homogeneous dynamic effects within each individual market but more heterogeneous effects across them, and is useful for predicting aggregate realized volatilities.

Item Type: Article
Official URL: https://academic.oup.com/jfec
Additional Information: © 2018 The Authors
Divisions: Statistics
Subjects: H Social Sciences > HB Economic Theory
H Social Sciences > HC Economic History and Conditions
JEL classification: C - Mathematical and Quantitative Methods > C3 - Econometric Methods: Multiple; Simultaneous Equation Models; Multiple Variables; Endogenous Regressors > C32 - Time-Series Models
G - Financial Economics > G1 - General Financial Markets > G15 - International Financial Markets
Sets: Departments > Statistics
Collections > Economists Online
Date Deposited: 02 Mar 2018 16:27
Last Modified: 20 Oct 2019 00:07
Projects: P7/06
Funders: Belgian Government, Banco Santander
URI: http://eprints.lse.ac.uk/id/eprint/86932

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