Abstract
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.
TopData And Methodology
This study aims to examine the time-varying connectedness between global macroeconomic risks and stock markets of developed and emerging countries. For this purpose, the authors use a multivariate generalized autoregressive conditional heteroscedasticity (GARCH) model, which provides a more convenient modeling approach than univariate models (Bauwens et al., 2006). This section introduces the dataset and the multivariate GARCH model used in the empirical analysis.
Key Terms in this Chapter
Correlation: A statistic that denotes an association between two quantitative variables; however, it does not show causality. Its coefficient indicates a linear relationship between two variables, and its value ranges between -1 and 1. A correlation coefficient that is less (greater) than zero denotes a negative (positive) relationship. If there is no relationship between two variables, the linear correlation coefficient would be zero.
Vaccination: An act of needle injection of a vaccine prepared with a killed microbe to stimulate or help the immune system against disease.
Stock Market: A venue where issuing, selling, and buying shares of publicly held companies and other securities.
Covariance: A measure of a directional relationship between two random variables. A positive covariance shows that those variables move together while a negative one indicates an inverse relationship.
Pandemic: A spread of a new infectious disease across a large region or worldwide and affecting a plenty number of individuals, e.g., the Covid-19 pandemic.
COVID-19: A very contagious respiratory illness caused by the SARS-CoV-2 virus and discovered in December 2019 in Wuhan, China.
S&P 500: A market capitalization-weighted index of the largest 500 publicly traded companies in the United States. It is one of the best measures of the US stock market performance and is used as a benchmark or a barometer by investors. S&P stands for Standard and Poor's, the founders' names.