Register  |  Login  |  Inquiries  |  Sitemap
Advanced Search
Journal of Economic Integration 2013 September;28(3) :412-440.
Asia-Pacific Stock Returns around the Lehman Shock and Beyond: time-varying conditional correlations
Jun Nagayasu 
University of Tsukuba, Tsukuba, Japan
Corresponding Author: Jun Nagayasu ,Tel: +81 298535067, Fax: +81 298535067, Email:
Copyright ©2013 Journal of Economic Integration
This paper attempts to identify economic and financial factors contributing to the changing correlations of recent stock returns. Time-varying correlations have been documented in previous studies, but few attempts have been made to investigate their evolution. Focusing on the Asia-Pacific region, this paper shows that daily return correlations tend to be higher in advanced countries, are negatively correlated with the distance between markets, and increase at times of active trading and financial turmoil. Furthermore, while some explanatory variables tend to lose their statistical significance during financial crises, volume data have strengthened their relationship with return correlations, particularly around the Lehman Shock.

JEL Classification
F36: Financial Aspects of Economic Integration
G15: International Financial Markets
Keywords: Dynamic Conditional Correlations | Stock Returns | Lehman Shock | Greek Crisis | Distance
1. Al-Rjoub, S. A. M. and H. Azzam (2012), ‘Financial crises, stock returns and volatility in an emerging stock market,’ Journal of Economic Studies 39, 178-211.
2. Baele, L., A. Ferrando, P. Hordahl, E. Krylova and C. Monnet (2004) ‘Measuring financial integration in the euro area,’ European Central Bank Occasion Paper Series No. 14.
3. Baker, D. and T. Loughran (2007) ‘The geography of S&P500 stock returns,’ Journal of Behavioral Finance 8, 177-190.
4. Bayoumi, T., G. Fazio, M. Kumar and R. MacDonald (2007) ‘Fatal attraction: using distance to measure contagion in good times as well as bad,’ Review of Financial Economics 16, 259-273.
5. Bollerslev, T., R. F. Engle and J.M. Wooldridge (1988) ‘A capital asset pricing model with time-varying covariances,’ Journal of Political Economy 96, 116-131.
6. Calvo, S. and C.M. Reinhart, C. M. (1996) ‘Capital flows to Latin America: is there evidence of contagion effects?’ In Calvo, G. A., Goldstein, M., Hochreiter, E. (Eds.) Private Capital Flows to Emerging Markets After the Mexican Crisis. Washington DC: Institute for International Economics (1996).
7. Chen, N-F. and F. Zhang, F. (1997) ‘Correlations, trades, and stock returns of the Pacific-Basin markets,’Pacific-Basin Finance Journal 5, 559-577.
8. Chintrakarn, P. and P. Prasatkitjaroen (2010) ‘Reassessing the determinants of international stock market correlation,’ International Research Journal of Finance and Economics 60, 7-14.
9. Choi, K. and S. Hammoudeh, 2010, ‘Volatility behavior of oil, industrial commodity and stock markets in a regime-switching environment,’ Energy Policy 38, 4388-4399.
10. Easley, D., Kiefer, N. and M. O’Hara (1997) ‘The information content of the trading process,’ Journal of Empirical Finance 4, 159–186.
11. Engle, R. (2002) ‘Dynamic conditional correlation: a simple class of multivariate generalized autoregressive conditional heteroskedasticity models,” Journal of Business and Economic Statistics 20, 339-350.
12. Engle, R. F. and K. Sheppard (2001) ‘Theoretical and empirical properties of dynamic conditional correlation multivariate GARCH,” Mimeo,UCSD.
13. Fidrmuc, J., K. Iwatsubo and T. Ikeda (2012) ‘International transmission of business cycles: evidence from dynamic correlations,’ Economic Letters 114, 252-255.
14. Flavin, T. J., M.J. Hurley and F. Rousseau (2002) ‘Explaining stock market correlation: a gravity model approach,’ Manchester School, 87-106.
15. Greene, M.T. and B.D. Fielitz, B. D. (1977) ‘Long-term dependence in common stock returns,’ Journal of Financial Economics 4, 339-349.
16. Hamao, Y., R.W. Masulis and V. Ng (1990) ‘Correlations in price changes and volatility across international stock markets,’ Review of Financial Studies 3, 281-307.
17. Kaminsky, G.L. (1993) ‘Is there a peso problem? evidence from the Dollar/Pound exchange rate, 1976-1987,’American Economic Review 83, 450-472.
18. King, M. A. and S. Wadhwani (1990) ‘Transmission of volatility between stock markets,’ Review of Financial Studies 3, 5-33.
19. Kuper, G. H. and Lestano (2007) ‘Dynamic conditional correlation analysis of financial market interdependence: an application to Thailand and Indonesia,’ Journal of Asian Economics 18, 670-684.
20. Lahrech, A. and K. Sylwester (2011) ‘US and Latin American stock market linkages,’ Journal of International Money and Finance 30, 1341-1357.
21. Lettau, M. and S. Ludvigson (2001) ‘Consumption, aggregate wealth, and expected stock returns,’ Journal of Finance 56, 815-849.
22. Levy, H. and M. Sarnat (1970) ‘International diversification of investment portfolio,’ American Economic Review 60, 668-675.
23. Lin, W-L., R.F. Engle and T. Ito (1994) ‘Do bulls and bears move across borders? international transmission of stock returns and volatility,’ Review of Financial Studies 7, 507-38.
24. Liu, Y. A., M-S. Pan and J.C.P. Shieh (1998) ‘International transmission of stock price movements: evidence from the US and five Asian-Pacific Markets,’ Journal of Economics and Finance 22, 59-69.
25. Longin, F. and B. Solnik (1995) ‘Is the correlation in international equity returns constant: 1960-1990,’ Journal of International Money and Finance 14, 3-26.
26. Nagayasu, J. (2013) ‘The forward premium puzzle and the euro,’ MPRA Paper 45746, University Library of Munich, Germany.
27. Makridakis, S. G. and S.C. Wheelwright (1974) ‘An analysis of the interrelationships among the major world stock exchanges,’ Journal of Business, Finance and Accounting 1, 195-215.
28. Masih, A. M. and R. Masih (1997) ‘Dynamic linkages and the propagation mechanism driving major international stock markets: an analysis of the pre- and post-crash eras,’ Quarterly Review of Economics and Finance 37, 859-885.
29. Pretorius, E. (2002) ‘Economic determinants of emerging stock market interdependence,’ Emerging Markets Review 3, 84-105.
30. Roll, R. (1992) ‘Industrial structure and the comparative behavior of international stock market indices,’Journal of Finance 47, 3-41.
31. Tamakoshi, G., Y. Toyoshima and S. Hamori (2012) ‘A dynamic conditional correlation analysis of European stock markets from the perspective of the Greek sovereign debt crisis,’ Economics Bulletin 32, 437-448.
32. Tse, Y. K. (2000) ‘A test for constant correlations in a multivariate GARCH Model,’ Journal of Econometrics 98, 107-127.
33. Yang, S-Y. (2005) ‘A DCC analysis of international stock market correlations: the role of Japan on the Asian four tigers,’ Applied Financial Economics Letters 1, 89-93.
PDF Links  PDF Links
Full text via DOI  Full text via DOI
Download Citation  Download Citation
Supplement  Supplement
Editorial Office
Center for Economic Integration, Sejong Institution, Sejong University, 209, Neungdong-Ro, Gwangjin-Gu,
Seoul, 05006, Korea
TEL : +82-2-3408-3338    FAX : +82-2-3408-3338   E-mail :
Browse Articles |  Current Issue |  For Authors and Reviewers |  About
Copyright© by Center for Economic Integration. All right reserved.