Relationship between Correlations and Volatilities of Global Equity Returns: An Empirical Study of the Eurozone Debt Crisis

  •  Jung-Lieh Hsiao    
  •  Hsueh-Ling Wu    
  •  Yu-Tzu Wang    


The objective of this study was to investigate the relationship between correlations of global equity returns and volatilities, in which equity markets are divided into two areas: one is PIIGS area (Portugal, Italy, Ireland, Greece and Spain) and the other is non-PIIGS area. Weekly index prices are collected spanning from January 5, 2001 to January 27, 2012, a total of 578 observations. Current study firstly used the best-fitted ARMA-GARCH model on each stock market and then utilized the diagonal AG-DCC model to derive the dynamic conditional correlations. The empirical finding suggests an overall regional factor denoted by PIIGS volatility (or volatility ratio) and a global factor by the U.S. counterpart during the Eurozone debt crisis. The finding of negative correlation between correlations and volatilities (or volatility ratio), mainly attributed to the PIIGS, is not in line with that of Cappiello, Engle, and Sheppard (2006). Moreover, the correlations of Germany with the other equity markets are not explained by the regional factor but by the global factor. The reason is that Germany has been the Europe’s most powerful economy and also plays a pivotal role in the management of Eurozone debt crisis. Lastly, investors may gain benefits from international diversification investment by including assets of PIIGS as well as either the Asian or the developed stock markets.

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