On macroeconomic determinants of co-movements among international stock markets: evidence from DCC-MIDAS approach

Arifenur Güngör; Hüseyin Taştan; Arifenur Güngör; Hüseyin Taştan

doi:10.3934/QFE.2021002

Quantitative Finance and Economics

2021, Volume 5, Issue 1: 19-39. doi: 10.3934/QFE.2021002

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Research article

On macroeconomic determinants of co-movements among international stock markets: evidence from DCC-MIDAS approach

Arifenur Güngör ^,,
Hüseyin Taştan

Department of Economics, Yildiz Technical University, Istanbul 34220, Turkey

Received: 07 October 2020 Accepted: 05 January 2021 Published: 08 January 2021
JEL Codes: C33, C58, E44, G15

This study aims to examine the macro-financial dynamics of the time-varying co-movements between the daily stock market returns of G7 and BRICS-T countries using a two-step procedure. Firstly, we decompose the dynamic conditional correlations between the daily stock market returns into the short-term (daily) and the long-term (quarterly) components using the DCC-MIDAS (Dynamic Conditional Correlation-Mixed Data Sampling) method for the period from 2002 to 2018. Then, we estimate the relationship between the quarterly DCC-MIDAS correlations and quarterly macroeconomic variables that represent the economic-financial proximity between country pairs using the System GMM (Generalized Method of Moments) method. Empirical results suggest that the most important factors which explain the long-term dynamic conditional correlations between the stock market returns of G7 and BRICS-T countries are the differences in GDP growth rates, five-year CDS risk premiums, and EPU (Economy Policy Uncertainty) indices between the country pairs.
- stock markets,
- time-varying co-movements,
- macroeconomics,
- DCC-MIDAS
Citation: Arifenur Güngör, Hüseyin Taştan. On macroeconomic determinants of co-movements among international stock markets: evidence from DCC-MIDAS approach[J]. Quantitative Finance and Economics, 2021, 5(1): 19-39. doi: 10.3934/QFE.2021002

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Abstract

This study aims to examine the macro-financial dynamics of the time-varying co-movements between the daily stock market returns of G7 and BRICS-T countries using a two-step procedure. Firstly, we decompose the dynamic conditional correlations between the daily stock market returns into the short-term (daily) and the long-term (quarterly) components using the DCC-MIDAS (Dynamic Conditional Correlation-Mixed Data Sampling) method for the period from 2002 to 2018. Then, we estimate the relationship between the quarterly DCC-MIDAS correlations and quarterly macroeconomic variables that represent the economic-financial proximity between country pairs using the System GMM (Generalized Method of Moments) method. Empirical results suggest that the most important factors which explain the long-term dynamic conditional correlations between the stock market returns of G7 and BRICS-T countries are the differences in GDP growth rates, five-year CDS risk premiums, and EPU (Economy Policy Uncertainty) indices between the country pairs.

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