Measuring financial interdependence in asset markets with an application to eurozone equities
Renee Fry-McKibbin, Cody Yu-Ling Hsiao, Vance L Martin
JOURNAL OF BANKING & FINANCE | ELSEVIER | Published : 2021
A general measure of asset market interdependence based on higher order comoments is developed and applied to studying weekly U.S. and eurozone equity returns from 1990 to 2017. A new test of independence is also developed. The empirical results show that interdependence peaks during the global financial crisis with the covariance and covolatility comoments being the dominant factors. Conditioning the interdependence measure on volatility does not change the overall qualitative results. Implications of the results for constructing diversified portfolios reveal economic benefits from portfolios based on higher order comoments than the usual assumption of bivariate normality, especially during..View full abstract
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Awarded by Macau SAR Government Higher Education Fund
This work was supported by the Australian Research Council and the Macau SAR Government Higher Education Fund (HSS-MUST-2020-11) (Discovery Project grant numbers DP140102137, 2014 and DP120103443, 2012). We thank the editor and referees of the journal for very helpful comments and suggestions on previous versions of the paper. We also thank Joshua Chan, Thomas Flavin, Xun Lu, Esfandiar Maasoumi, James Morley, Pengfei Wang, Benjamin Wong, Sen Xue, Matthew GreenwoodNimmo and Chrismin Tang for helpful and constructive comments. Author email addresses are:firstname.lastname@example.org,email@example.com,firstname.lastname@example.org.Corresponding author is Cody Yu-Ling Hsiao.