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Study of the Correlation between the Romanian Stock Market and S&P500 Index during 2007-2009
01 Mar 2011-The Romanian Economic Journal (Department of International Business and Economics from the Academy of Economic Studies Bucharest)-Vol. 14, Iss: 39, pp 233-255
TL;DR: In this paper, the authors study the evolution of the Bucharest Stock Exchange (BSE) and the particularities of its correlation with international stock markets during Jan 2007 - Dec 2009.
Abstract: This article aims to study the evolution of the Bucharest Stock Exchange (BSE) and the particularities of its correlation with international stock markets during Jan 2007 - Dec 2009. The linear regression and correlation analysis on weekly and monthly data shows a good degree of synchronization between the main indices of BSE and S&P500, but also sometimes a specific behavior of the Romanian stock market that could be at least partly explained by its lack of maturity.
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TL;DR: In this article, the authors calibrate the Fama-French three-factor model on the Bucharest Stock Exchange and show that the model captures more variation in portfolio returns than the classical model.
Abstract: The Fama–French three-factor model is known to explain the cross-section of average returns better than the market beta alone across various international equity markets. No such implementation exists, however, for the Romanian capital market. This paper contributes to the existing literature by calibrating the model on the Bucharest Stock Exchange and by relying on a complex, correct and complete database. We show that the three-factor model captures more variation in portfolio returns than the classical model (as attested by the higher adjusted R 2 ) while it also passes standard diagnosis tests (the hypothesis that pricing errors are jointly equal to 0 cannot be rejected by the GRS test statistics on the regressions intercepts). Robustness check demonstrates that the model is informative on seemingly unrelated time series; further, we also provide a simple application of performance attribution.
5 citations
Cites background from "Study of the Correlation between th..."
...However, most of the other studies dedicated to the Romanian equity market concentrate on modeling returns or volatility using only past prices as dependent variables (Acatrinei and Caraiani, 2011; Necula, 2009; Pele and Voineagu, 2008) or use other global indices or macro variables (Panait, 2011)....
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TL;DR: In this paper, the influence of international capital markets on the evolution of Bucharest Stock Exchange during 2007-2011 in two separate periods (during the 2007-2009 crisis and after the crisis), using correlation analysis and Granger causality tests on daily data.
Abstract: International capital markets tend to be characterized by volatility, which is always a function of world economic and political environment and is frequently associated with contagion risk and increased cross-market linkages. This phenomenon affects both developed markets and emerging markets, and, being integrated in the context of international financial markets through the globalization process, Romanian capital market could not avoid external influencing factors amplificated by economic recession. We have analyzed the the influence of the international capital markets on the evolution of Bucharest Stock Exchange during 2007-2011 in two separate periods (during the 2007-2009 crisis and after the crisis), using correlation analysis and Granger causality tests on daily data. Our main interest was to see if and how the behavior of the Bucharest Stock Exchange was different during the crisis and after the crisis and how the volatility of the Romanian market changed in the post crisis period. Our results confirmed the high degree of interconnectivity between financial markets revealed by general theory, showing that there was a high degree of correlation between the Romanian stock market and international markets during the 2007-2009, but afterwards the intensity of this correlation slightly declined. Another conclusion was that during the whole 2007-2011 period there was a clear one-way causality induced from the international capital markets towards Bucharest Stock Exchange.
4 citations
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TL;DR: In this article, the authors studied the correlation between the banking sector and the foreign exchange market during and after the financial crisis and found that there is a unidirectional causality running from the RON / EUR exchange rate to the prices of the Romanian banks included in the study, except for Patria Bank.
Abstract: In the context of globalization and the financial crisis that the world traversed over the period 2007-2009, the Romanian capital market suffered extreme shocks (stock indices recording a decline of up to 90% while the national currency depreciated sharply against EUR and USD), which led to a significant increase in volatility in the national financial market. Considering that the financial sector was the trigger of the crisis and one of the most affected sector, we chose to analyze whether we can talk about the foreign exchange rate impact on price of the bank shares traded on the Bucharest Stock Exchange and vice versa (during March 2008 -June 2017), using correlation and VAR Granger Causality test. Frequency of data is daily. We also studied the evolution of the correlation between the banking sector (represented bythe shares of the banking companies traded on the Bucharest Stock Exchange) and the foreign exchange market during and after the financial crisis.Next, we analyzed volatility changes in this sector in the post-crisis period compared to the one recorded during the financial crisis. We have included the three Romanian banks: BRD-Groupe Societe Generale, Banca Transilvania, Patria Bank and two foreign banks traded on BSE: Erste Bank AG and Deutsche Bank and RON/EUR and RON/USD exchange rates.The results of the study showed that we can speak of a unidirectional causality running from the RON / EUR exchange rate to the prices of the Romanian banks included in the study (except for Patria Bank) and of a bidirectional causality for foreign banks Erste Bank and Deutsche Bank. During the crisis (as could be expected), we noticed an increase in volatility and market correlation and a slight decline once the effects of the crisis began to dissipate.
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TL;DR: The authors showed that correlation coefficients are conditional on market volatility, and that there was virtually no increase in unconditional correlation coefficients (i.e., no contagion) during the 1997 Asian crisis, 1994 Mexican devaluation, and 1987 U.S. market crash.
Abstract: Heteroskedasticity biases tests for contagion based on correlation coefficients. When contagion is defined as a significant increase in market comovement after a shock to one country, previous work suggests contagion occurred during recent crises. This paper shows that correlation coefficients are conditional on market volatility. Under certain assumptions, it is possible to adjust for this bias. Using this adjustment, there was virtually no increase in unconditional correlation coefficients (i.e., no contagion) during the 1997 Asian crisis, 1994 Mexican devaluation, and 1987 U.S. market crash. There is a high level of market comovement in all periods, however, which we call interdependence.
3,389 citations
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TL;DR: In this article, the authors examined stock market co-movements and applied these concepts to test for stock market contagion during the 1997 East Asian crises, the 1994 Mexican peso collapse, and the 1987 U.S. stock market crash.
Abstract: This paper examines stock market co-movements. It begins with a discussion of several conceptual issues involved in measuring these movements and how to test for contagion. Standard tests examine if cross-market correlation in stock market returns increase during a period of crisis. The measure of cross-market correlations central to this standard analysis, however, is biased. The unadjusted correlation coefficient is conditional on market movements over the time period under consideration, so that during a period of turmoil when stock market volatility increases, standard estimates of cross-market correlations will be biased upward. It is straightforward to adjust the correlation coefficient to correct for this bias. The remainder of the paper applies these concepts to test for stock market contagion during the 1997 East Asian crises, the 1994 Mexican peso collapse, and the 1987 U.S. stock market crash. In each of these cases, tests based on the unadjusted correlation coefficients find evidence of contagion in several countries, while tests based on the adjusted coefficients find virtually no contagion. This suggests that high market co-movements during these periods were a continuation of strong cross-market linkages. In other words, during these three crises there was no contagion, only interdependence.
3,038 citations
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TL;DR: In this paper, the authors investigated why almost all stock markets fell together despite widely differing economic circumstances and found that "contagion" between markets occurs as the result of attempts by rational agents to infer information from price changes in other markets.
Abstract: This paper investigates why, in October 1987, almost all stock markets fell together despite widely differing economic circumstances. The idea is that "contagion" between markets occurs as the result of attempts by rational agents to infer information from price changes in other markets. This provides a channel through which a "mistake" in one market can be transmitted to other markets. Hourly stock price data from New York, Tokyo and London during an eight month period around the crash offer support for the contagion model. In addition, the magnitude of the contagion coefficients are found to increase with volatility.
1,779 citations
TL;DR: In this article, the authors investigated why almost all stock markets fell together despite widely differing economic circumstances and found that "contagion" between markets occurs as the result of attempts by rational agents to infer information from price changes in other markets.
Abstract: This paper investigates why, in October 1987, almost all stock markets fell together despite widely differing economic circumstances. The idea is that "contagion" between markets occurs as the result of attempts by rational agents to infer information from price changes in other markets. This provides a channel through which a "mistake" in one market can be transmitted to other markets. Hourly stock price data from New York, Tokyo and London during an eight month period around the crash offer support for the contagion model. In addition, the magnitude of the contagion coefficients are found to increase with volatility.
1,546 citations
TL;DR: In this article, the relative importance of world and local information to change through time in both the expected returns and conditional variance processes is analyzed, and the authors find that capital market liberalization often increase the correlation between local market returns and the world market but do not drive up local market volatility.
1,423 citations