What is Correlation

This chapter examines the time-varying linkages between global macroeconomic risks and stock market returns of developed and emerging countries. For this purpose, the authors estimate the Diagonal-BEKK GARCH models for the period from January 5th, 2015 to January 4th, 2022. To consider the impact of a black swan event, the authors also estimate the models for the sub-periods: the pre-vaccination pandemic period and the COVID-19 pandemic period. Empirical findings suggest negative conditional covariances amongst the macro risks and the stock market performance; however, the magnitudes of those covariances differ by development levels of stock markets and time horizons. In addition, those conditional covariances exhibit significant volatility clustering. Furthermore, this study puts forward sudden slumps and spikes in the conditional covariances between the macro risks and the stock market returns at the onset of the COVID-19 pandemic; however, these fluctuations are sudden and short-lived.