Potential Dependence of Financial Cycles between Emerging and Developed Countries: Based on ARIMA-GARCH Copula Model

ABSTRACT

The characteristics and dependence structures of financial cycles have become a central issue in macroeconomic policy. Our study quantifies the dependence of financial cycles in emerging and developed countries in January 1993–December 2017. We fit the marginal distributions of the financial cycles by applying an ARIMA-GARCH model and capture the dependence structures by selecting the optimal copula model. Our main findings indicate that the financial cycle has obvious characteristics that can be roughly divided into three stages. ARIMA (2,1,2) and GARCH (1,1) are fit the marginal distribution of the financial cycle. Emerging countries show more interdependence and a higher degree of dependence than developed countries. Several important policy and economic implications can be drawn from the empirical results of this study.

KEY WORDS:

• ARIMA-GARCH copula
• emerging and developed countries
• financial cycles
• potential dependence

JEL CODES:

• E32
• E37

Acknowledgments

The authors are most grateful to two reviewers for very helpful comments and suggestions. I also would like to thank the Research Plan for Joint-Training Graduate of Guangzhou University for sponsoring this research.

Supplementary material

supplementary data for this article can be accessed here.

Notes

1. Among the sample developed countries, the most common choice is G7 (United States, United Kingdom, Germany, France, Japan, Italy, and Canada), which is also our initial consideration. After measuring the financial cycle, we found that Italy’s financial cycle trends are close to those in France. Moreover, Canada has a similar relationship with the United States, because Italy and France (Canada and the United States) are similar in terms of credit, business, and other structures. For three reasons as follows, we do not discuss the financial cycles in Italy and Canada. First, the empirical results for Italy (Canada) are similar to those for France (United States). Second, this maintains a consistent number of representatives from emerging and developed countries. Third, we need to reduce unnecessary parameter estimates.

2. The methods used to standardize the data in this paper and for determining weights are not significantly different from other methods.

3. The exchange rate means the nominal effective exchange rate.

Additional information

Funding

This work was supported by the Humanities and Social Sciences Foundation for Key Program of the Higher Education Institutions of Guangdong Province, China [2016WZDXM023].