Abstract
This article examines the international stock market correlations between Japan vis-à-vis the Asian Four Tigers (Taiwan, Singapore, Hong Kong, and South Korea) using Engle's (Citation2002) dynamic conditional correlation (DCC) analysis. Daily data from 1990 to 2003 are used in this study. The results show that stock market correlations fluctuate widely over time and volatilities appear to be contagious across markets. In addition, correlations increase during periods of high market volatilities when risk diversification is needed most, and that is bad news for international diversification.
Notes
It is difficult to come out with a unanimous agreement on the period of Asian Crisis for different countries. The crisis dummy is set from 1997/1/1 to 1998/6/30 to encompass the short time before and after crisis period. Thus, one can have more information about the evolution of the correlations right before and after the crisis period.
The Nikkei 225 Index dropped from 38 915.87 (1990/1/2) to 14 309.41 (1992/8/18). After 1993, in general, the Nikkei 225 became more stable and fluctuated in between 15 000 and 10 000 points.
The innovations in the Japanese market have less impact on the Taiwanese market, roughly half of the impact on the other three markets.
The coefficients of volatility are much larger for Japan than the others. The results imply that the Japanese market or volatility has larger effect on the evolution of correlations. The result is not surprising since the stock market capitalization of Japan is much bigger than that of Taiwan, Singapore, Hong Kong and South Korea. The average R 2 (bar) for the regression models is 0.3218. It means roughly 30% of correlation evolution is explained by variables included in the model.