Measuring financial interdependence in asset markets with an application to eurozone equities

Renée Fry-McKibbin, Cody Yu Ling Hsiao, Vance L. Martin

Research output: Contribution to journalArticlepeer-review

16 Citations (Scopus)

Abstract

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 the GFC. The empirical results also provide evidence that European Union membership led to higher interdependence than did the adoption of the common currency.

Original languageEnglish
Article number105985
JournalJournal of Banking and Finance
Volume122
DOIs
Publication statusPublished - Jan 2021
Externally publishedYes

Keywords

  • Comoment decomposition
  • Contagion
  • Entropy
  • Generalized distributions
  • Portfolio diversification
  • Testing

Fingerprint

Dive into the research topics of 'Measuring financial interdependence in asset markets with an application to eurozone equities'. Together they form a unique fingerprint.

Cite this