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What Is Co-Movement?
What Is Co-Movement?
What Is Co-Movement?
Dirk Baur∗
European Commission, Joint Research Center, Ispra (VA), Italy
IPSC - Technological and Economic Risk Management
Abstract
∗
Email: dirk.baur@jrc.it
1
Dependence among random variables is a nasty business and we usually ignore the nas-
tiness (at our peril) by employing measures of linear association like the Pearson correlation
coefficient.
1 Introduction
The analysis of common stock market movements is important for effective portfolio di-
versification and a possible starting point to investigate the functioning of the global fi-
nancial system. This is particularly important when assessing financial crises and their
contagious effects. The study of common market movements is, however, also interest-
ing in two additional respects. First, there is no clear and unambiguous definition of
’co-movement’ and no unique measure associated with it. Even the spelling is oscillating
GARCH models do provide estimates for time-varying correlations but are often based on
severe restrictions to guarantee a well-defined covariance matrix (e.g. see Kroner and Ng,
1998).
There seems to be a countless number of papers that contain the word ’co-movement’ in
the title (e.g. see Connolly and Wang, 2001, Forbes and Rigobon, 2002, Karolyi and Stulz,
1996, Kroner and Ng, 1998 and Malevergne and Sornette, 2002). However, there is only
one explicit definition of co-movement (see Barberis et al., 2002) where co-movement is
term and can describe many types of relationships. Even if we assume that this definition
is based on the Pearson correlation coefficient (see Pearson, 1901), the definition remains
imprecise and co-movement would only be defined for a particular class of relationships,
2
i.e. linear co-movements.1
We will argue that the correlation coefficient does not adequately measure co-movement.
Furthermore, the correlation coefficient exhibits various inaccuracies that make a defini-
the mathematical formalities that are commonly used in modelling economic and financial
relationships.
This paper proposes a definition of co-movement and an associated measure that pre-
cisely reflects the meaning of co-movement and also reveals the direction and the volatility
of co-movement.
Recently, new non-parametric measures have been developed to describe common (joint)
market movements without recurring to the correlation coefficient. However, these contri-
butions do also not define co-movement. Harding and Pagan (1999) introduce a measure
measure to assess market co-movement and Bae et al. (2003) introduce ’co-exceedances’
this paper can be viewed as a generalization of the concept of Bae et al. (2003) and is
The remainder of this paper is as follows: section 2 introduces the definition and as-
sociated measure of co-movement. Section 3 contains a simulation study that shows the
countries and also for multivariate return series and section 5 summarizes the main re-
3
2 Co-movement
The only explicit though not sufficient definition of co-movement (comovement) can be
found in Barberis et al. (2002): Comovement can be defined as a pattern of positive correla-
tion. This definition is based on the correlation coefficient and does not explicitly describe
the meaning of co-movement. In other words, co-movement is defined with the correlation
It is also important to note that ’co-movement’ is a special technical term and can not be
found in a common dictionary (e.g. see Webster’s New World College Dictionary, 1999). It
could be originating from the verb commove which means to move violently or intensely
and the associated noun commotion. There are a several papers that use terms like ’excess
co-movement’ (e.g. Forbes and Rigobon, 2002) and ’extreme co-movements’ (e.g. Malev-
ergne and Sornette, 2002) to describe a phenomenon that could also be called ’commotion’.
However, we believe that co-movement is a construction that is based on the prefix con
which means ’with’. This is consistent with the origin of ’correlation’ which is equivalent to
’con-relation’ and means that there is a reciprocal relationship.3 The word ’correlation’ is
Thus, the definition that shall be introduced here is based on the notion that ’co-movement’
another asset (price). We interpret this ’moving with’ as movement which is shared by all
assets or movement that all assets have in common. This is similar to ’co-integration’ that
act of operating together or a joint operation. Hence the definition of co-movement can be
formulated as follows:
3
In classic roman, the preposition ’con’ was also shortened into ’co’.
4
e.g. see http://lilt.ilstu.edu/drjclassics/Latin/explanations/assimilation.shtm
4
Definition 1:
Since the movement (change) of an asset is the return of an asset, co-movement can
The associated measure that precisely reproduces this definition of co-movement is given
by
where rit is a return of market i at time t and I − (I + ) is an indicator variable that is equal
The following examples aim to clarify this measure of co-movement: a return pair (-1,-1)
leads to co-movement Φt = −1 of the underlying assets (prices) since both returns have the
same value. A return pair (-2,-3) leads to co-movement Φt = −2 of the underlying assets
since the maximum of both shocks is −2. Two positive shocks (2,3) lead to co-movement
Φt = 2 since the minimum of these shocks is 2. Return pairs with different signs as e.g.
(3,-1) lead to co-movement Φt = 0 since there is no common movement in one direction. Co-
movement can also be assessed for more than two return series. For example, the returns
of four markets at time t (-2,-1,-3,-1) exhibit a co-movement of −1 and the return vector
for the return vector (+2,+1,+3,-2) since the returns do not all have the same sign.
Since the co-movement measure introduced above is not based on standardized values
of returns, the relative movement that is shared by all assets can not be assessed directly.
For example, given that the co-movement of two assets is −1 at time t, it is not clear
whether this is a relatively large movement or rather negligible since the means and the
5
This shortcoming can be eliminated by standardizing the underlying returns to have
mean zero and variances equal to one. Then the co-movement is a measure of the common
Definition 2:
Relative Co-movement is the relative movement of assets that is shared by all assets at time
t.
In other words, relative co-movement is the relative (standardized) return that is shared
among different sets (or portfolios) of returns more straightforward, we focus on this mea-
sure subsequently. The relative measure of co-movement can also be viewed as an appli-
cation of the continuous version of coexceedance introduced by Baur and Schulze (2003).6
One crucial difference why the correlation coefficient does not qualify to be an adequate
measure of co-movement can be outlined by the following example. The correlation coeffi-
cient can be written as the product of the standardized residuals (see Engle, 2002):
where ²i,t is the shock to market i at time t and zi,t is the associated standardized shock.
Assumed that two standardized shocks at t are 0.3 and 0.5, then ρ12,t would exhibit a
value of 0.15. Assumed that both standardized shocks would double, then the correlation
coefficient would yield a value of 0.6 which is four times larger. More severe and more in-
consistent with the notion of co-movement is the event where only one standardized shock
doubles. In this case, the correlation coefficient would double although the co-movement
cannot be assumed to have increased since the common movement is more unequal com-
pared to the initial shocks. This example explains the finding that the correlation coef-
6
The term ’Coexceedances’ is introduced by Bae et al. (2003).
6
ficient is biased by heteroscedasticity reported by Boyer et al. (1999) and Loretan and
English (2000).
Apart from this difference regarding the relation of the measure with the notion of
in this paper: the measure (i) is easy to interpret, (ii) shows the direction (positive and
negative) of co-movements, (iii) can reveal time-varying co-movement for bivariate and
multivariate series and (iv) can detect linear and non-linear co-movement.
The main strength is the possibility to analyze the co-movement for many stock mar-
kets simultaneously without the need to impose any restrictions as this is necessary in
between −1 and +1 as the correlation coefficient, it is easy to interpret this value and to
The next section aims to clarify the advantages and presents a simulation study that
also reveals the relation between the correlation coefficient and the co-movement measure
proposed here. This analysis also shows under which circumstances co-movement can be
coincidental.7
3 Simulation Study
In this section we analyze the behavior of the co-movement for different types of market
We first simulate bivariate normally distributed returns with mean zero and an un-
cesses and a constant volatility for both returns. The simulated correlation processes are
figure 1. The figure shows that the co-movement does not exhibit any clear time-variation
7
It additionally provides results for the behavior of ’co-exceedances’ introduced by Bae et al. (2003).
7
for the upper three correlation processes. It is clear, however, that the left upper graph
exhibits some co-movement, the middle upper graph strong co-movement and the right
upper graph low co-movement. This is intuitive given the simulated correlation processes
of ρ = 0, ρ = 0.95 and ρ = −0.95, respectively. The lower three graphs clarify the behavior
of the co-movement measure: the co-movement is high for high positive correlations and
Since the simulated processes are not autocorrelated, there is no persistence of positive
or negative co-movement.
Figure 2 presents results for the same correlation processes as in figure 1 but assumes
an increasing (deterministic) volatility for both returns (v1t = v2t = 0.001t where vit is the
volatility of market i at time t). The co-movement increases with increasing volatility and
the time-varying behavior is less pronounced. Note that this effect is less pronounced if
It is important to stress that increased volatility can increase the (extreme) values of
co-movement. However, in contrast to the correlation coefficient (see Boyer et al., 1999 and
Loretan et al., 2000), it cannot be argued that the co-movement measure Φ is biased. High
volatility is characterized by larger absolute returns and this can also affect the values of
the co-movement but does not affect the percentage of occurrences of co-movement.8
Since the extreme values of co-movement can increase with volatility this means that
different periods of market volatility or structural breaks can be identified with the co-
We now assume that markets are influenced by a common factor ft that is normally
distributed with mean zero and variance one. In addition, N idiosyncratic shocks ²it are
assumed to be uncorrelated and also normally distributed with mean zero and variance
one. The N return series to be generated do depend on the common factor ft and the
8
The percentage of co-movement occurrences are analyzed below.
8
idiosyncratic shocks ²it as follows:
√ √
rit = aft + 1 − a²it (3)
where rit is the return of market i at time t and a is the constant factor loading. We assume
a = 1, a = 0.5 and a = 0. The plots that show the behavior of N = 5 markets are given by
figure 3. The upper graph is a plot for a = 1, the centered graph for a = 0.5 and the bottom
It is shown that the co-movement decreases with decreasing factor loadings and with
increasing number of markets. Of course, the true co-movement structure could be charac-
terized by a mixture of these examples. In particular, the factor loading a could also vary
through time.9
independent, standard normally distributed returns and tabulate the observed percentage
whether there was co-movement (indicator variable equal to 1) or not (indicator variable
A simulation study with T = 1.000.000 observations is performed and results are given
by table 1. The percentage of co-movements that are tabulated can be viewed as a lower
bound of co-movement for N series. Of course, the upper bound is 1 if all series are equal.
The table shows that two (ten) independent return series exhibit a number of co-movements
9
Table 1: Percentage of Co-movement for N independent series
N percentage of co-movement
2 0.5000
3 0.2500
4 0.1250
5 0.0625
6 0.0313
7 0.0156
8 0.0078
9 0.0039
10 0.0020
N number of markets
Simulation results based on T = 106 observations
4 Empirical Analysis
We use monthly continuously compounded stock index returns of eleven developed stock
markets10 : Australia (AUS), France (FRA), Germany (GER), Hong Kong (HK), Italy (ITA),
Japan (JAP), Singapore (SIN), Spain (SPA), Sweden (SWE), the United Kingdom (UK) and
The indices span a time-period of approximately 30 years from December 1969 until
The monthly returns for all eleven stock markets are plotted in figure 4. The figure
mainly shows the changing volatilities of the returns, especially around the oil crisis in
1973, the stock market crash in October 1987 and the Asian crisis 1997.
In order to get further information of the returns, descriptive statistics are presented
in table 2. While most of the markets exhibit typical return characteristics, there are
some exceptions: the monthly return of Australia is highly skewed and leptokurtic, the
Hong Kong returns have the largest span between the minimum and maximum return
(−0.5734 and 0.6295) and Japan is the only market that exhibits a return distribution that
10
Table 2: Descriptive Statistics
Mean Std. Dev. Min Max Skewness Kurtosis Prob (Jarque Bera)
correlations (above 0.5) can be found between Germany and France, Germany and Sweden,
UK and France, UK and US and Australia and the US. The lowest correlations (below 0.25)
can be observed for Italy and Hong Kong and Italy and Singapore.
Since Germany is the biggest market in the European Union and an important financial
market in a global context, we analyze the bivariate co-movement of Germany with the re-
maining markets in the sample of eleven countries. This analysis has exemplary character.
An analysis of all pairs of countries is not performed due to space considerations. In a sec-
ond step, we build ’portfolios’ with equal weights to analyze the multivariate co-movements
among financial markets. We analyze four ’big’ (industrial) countries (GER, JAP, UK, US),
11
European countries (GER, FRA, ITA, SPA, SWE, UK), ’Asian’ (Pacific) countries (AUS, HK,
JAP, SIN), the ’EURO’ countries (FRA, GER, ITA, SPA) and finally, all eleven countries.
We commence with a descriptive analysis of the relative co-movements and then ana-
Bivariate Co-movement of GER with ... Mean Std Min Max Skewness Kurtosis Percentage of Co-movement
AUS -0.0049 0.5043 -3.3732 1.8887 -1.5412 11.5270 0.5990
FRA -0.0153 0.7074 -3.2184 2.3466 -0.8831 6.3010 0.6992
ITA -0.0075 0.5057 -3.3732 1.8887 -1.1500 9.9659 0.6247
JAP -0.0061 0.5834 -2.1539 1.7702 -0.3928 5.1828 0.6170
HK -0.0088 0.5515 -2.8716 1.9441 -0.5955 7.0700 0.5861
SIN -0.0202 0.5401 -3.3732 1.9845 -1.6298 12.0113 0.5681
SPA -0.0009 0.6116 -3.3732 1.9420 -1.2222 9.5673 0.6555
SWE -0.0114 0.6311 -3.3897 2.3634 -1.0992 8.2573 0.6838
UK -0.0267 0.5761 -3.3732 1.9845 -0.8589 7.6962 0.6452
US -0.0271 0.6004 -3.3732 1.8887 -1.3780 9.1397 0.6272
Multivariate Co-movement Mean Std Min Max Skewness Kurtosis Percentage of Co-movement
4 markets -0.0165 0.3382 -2.4149 1.4996 -1.3323 13.5043 0.3162
European -0.0158 0.3088 -1.8203 1.1260 -1.5770 13.2890 0.2699
Asian -0.0260 0.3095 -1.6806 1.1541 -1.7898 11.7682 0.3290
EURO -0.0131 0.4192 -2.0728 1.4298 -1.3617 10.6356 0.3830
all -0.0140 0.1698 -1.3227 0.7519 -3.3574 30.6073 0.1183
4 markets (GER, JAP, UK, US) Mean Std Min Max Skewness Kurtosis Percentage of Φt
4 markets
t = 1 : 130 -0.0257 0.3576 -2.4149 1.1535 -2.3269 20.0141 0.2288
t = 131 : 260 0.0149 0.3422 -1.3227 1.4996 -0.4197 10.1489 0.3059
t = 261 : 389 -0.0390 0.3135 -1.2730 0.8225 -1.0865 6.4687 0.4139
European markets
t = 1 : 130 -0.0484 0.2577 -1.8203 0.4343 -4.0245 23.6842 0.1825
t = 131 : 260 -0.0059 0.3365 -1.8088 1.0353 -1.6455 13.3952 0.2442
t = 261 : 389 0.0071 0.3260 -1.2730 1.1260 -0.3643 7.3923 0.3830
Asian markets
t = 1 : 130 -0.0056 0.2949 -1.6806 0.6905 -2.2745 13.8554 0.3599
t = 131 : 260 -0.0182 0.2940 -1.3227 1.1541 -1.2520 11.0112 0.2519
t = 261 : 389 -0.0544 0.3382 -1.6292 1.0388 -1.7603 10.5395 0.3753
EURO markets
t = 1 : 130 -0.0503 0.3548 -1.8203 1.2582 -2.1838 13.4287 0.3059
t = 131 : 260 0.0043 0.4564 -2.0728 1.4298 -1.3202 10.5335 0.3599
t = 261 : 389 0.0068 0.4403 -1.9615 1.2028 -1.0371 8.6555 0.4833
t = 261 : 348? 0.0511 0.3978 -1.9615 1.1551 -0.8978 10.4859 0.4545
t = 349 : 389? -0.0883 0.5123 -1.8991 1.2028 -0.9791 6.2739 0.5366
All markets
t = 1 : 130 -0.0181 0.1410 -1.2738 0.2355 -6.3947 52.9501 0.1054
t = 131 : 260 -0.0061 0.1879 -1.3227 0.7519 -2.4546 27.5335 0.0900
t = 261 : 389 -0.0179 0.1779 -1.1592 0.6641 -2.7842 21.7050 0.1594
? T = 349 is the month of the introduction of the EURO currency (January 1999).
Table 4 shows various statistics for the bivariate co-movement between Germany and
12
all remaining ten markets as an exemplary selection and for multivariate co-movement for
four countries (GER, JAP, UK and US), European countries (GER, FRA, ITA, SPA, SWE,
UK), Asian countries (AUS, HK, JAP, SIN), the ’EURO’ countries and all markets simulta-
neously. The table includes the mean, standard deviation, minimum, maximum, kurtosis,
skewness and the percentage of the occurrences of co-movements. The standard deviation
of co-movement varies for the bivariate measure and is clearly smaller for multivariate
The co-movement of Germany and France exhibits the highest standard deviation and
the highest percentage of co-movements for the bivariate results (0.6992). Note that the
standard deviations of these series are amongst the lowest in the sample. Hence, the high
standard deviation of the co-movement cannot be explained with the standard deviations
of the underlying series. The co-movement between Germany and Singapore is most ex-
tremely skewed and leptokurtic. In addition, almost all bivariate co-movements exhibit a
minimum value close to four standard deviations below their mean (−3.3732) and many a
maximum value around two standard deviations above their mean although the maximum
value is 2.3466 of the co-movement between Germany and Sweden. This means that the
maximum common movement was almost four standard deviations for negative returns
The second highest percentage of co-movement can be observed for Germany and Swe-
den (0.6838). All percentages of co-movements are considerably above the lower bound for
two independent series of 0.5 but also well below the upper bound of 1.0 for two equal
series.
The negative skewness that exhibit all bivariate co-movements is a clear indicator that
negative co-movements are more pronounced than positive co-movements (see also Ang
and Chen, 2002, De Santis and Gerard, 1997 and Longin and Solnik, 2001). Even if the
original return series are negatively skewed, this does not necessarily imply that large
negative shocks occur at the same time. The return characteristics of Germany and the
13
UK stress this statement since the UK return is positively skewed but the co-movement
Figures 5 and 6 present the results for a selection of markets (France, UK and the US)
in a graphical manner. The evolution of the co-movement through time and the histograms
show that the co-movement of Germany with France is most frequent (lowest number of
The multivariate results are different especially with respect to the percentages of co-
movement since the number of markets analyzed is not confined to two. However, the
skewness of the series is again confirming the findings obtained from the bivariate analysis
The percentage of co-movements for the first multivariate sample (GER, JAP, UK, US)
exhibits a value of 0.3162 which is well above the lower bound for four independent series
of 0.125 (see table 1). The six European markets exhibit a value of 0.2699 which is even
larger compared to the lower bound benchmark (0.0313). The four Asian markets exhibit
relatively high co-movement (0.3290) but considerably less than the four EURO markets
sharing one common currency (0.3833) in the end of the sample. Finally, the sample con-
sisting of all eleven markets exhibits a value 0.1183. This means that all eleven markets
The descriptive statistics presented above only provide a limited picture. Hence, we
first take a closer look at three equal subsamples and then analyze the evolution of co-
movement through time. The results of the subsamples are shown by table 5. We focus the
analysis on the skewness and the percentage of co-movements. It can be stated that the
skewness decreases in absolute values compared to the first period (first subsample, t = 1
until t = 130) for all ’portfolios’ but increases in absolute values compared to the second
The percentage of co-movements increases for all ’portfolios’ in the last period com-
12
Note that this is not equivalent to the fact that negative co-movements are more frequent.
14
pared to the first sample period. However, this rise in co-movement is not monotonic. The
co-movement decreased in the second sample period for the Asian markets (from 0.3599
to 0.2519) and for all eleven markets (from 0.1054 to 0.0900). The strongest rise in co-
movement can be observed for the four EURO markets, increasing from 0.3059 to a value
of 0.4833.
The following brief description of the associated figures aims to clarify the results ob-
tained and also shows the time-varying behavior of co-movement. The crisis dates as
Figure 7 shows that the co-movement between Germany, Japan, UK and the US is
more frequent in the end of the sample than in the beginning of the sample. However,
the volatility of the observed co-movements. The co-movement for six European markets
shows that the frequency of co-movements has increased, especially after the stock market
crash in October 1987. Interestingly, there is no co-movement in the proximity of the crash
date, neither before nor after. The plot for the four Asian markets is very different to the
previous two examples since there is no clear tendency of more frequent co-movements or
increased co-movements (in magnitude) since 1969. There is some clustering of positive
and negative co-movements especially at the beginning of the sample. The co-movement
of the ’EURO’ markets reveals an increased frequency of co-movement especially after the
introduction of the euro currency in January 1999. Finally, the co-movement of all eleven
stock market indices in the sample is very low and it cannot be concluded that this number
The previous section has analyzed and interpreted the number of co-movements in per-
centages of the sample observations. We now extend this analysis and estimate the prob-
15
abilities of the occurrences of positive and negative co-movements through time. An ade-
quate model to estimate the probability of different ranges of co-movement (e.g. positive
and negative co-movement) is a multinomial logit model. It can also be viewed as a natural
extension of the descriptive analysis previously done and given by the last column of table
6.
The analysis shall focus on three questions. First, has the probability of co-movement
increased in recent years. Second, are there considerable differences of the probabilities of
positive and negative co-movement and third, has the probability of extreme movements
increased in recent years potentially affecting the stability of the financial system. The
latter model can be viewed as an analysis of the structure of dependence (and not only the
Since we model positive and negative co-movements separately and additionally include
and not only their occurrence. The number of ranges (i.e. categories) of co-movement
could also be extended to obtain a more detailed picture of the factors that cause markets
to move jointly.
The advantages compared to Multivariate GARCH models are the flexibility of includ-
ing covariates without risking indefinite covariance matrices and the possibility to analyze
Note that the following analysis is different to the Bae et al. (2003) approach. The only
similarity is the use of a multinomial logit model. Bae et al. estimate the probabilities of
using daily data. The analysis made here focusses on long-term co-movements and models
the probabilities of the occurrence of co-movements through time for given portfolios of
indices.
13
The differentiation of ’degree of dependence’ and ’structure of dependence’ can be found in Hu (2002).
14
Note also that the computational time necessary is negligible compared to Multivariate GARCH models.
16
The initial model is estimated with three categories: (i) no co-movement, (ii) positive
co-movement and (iii) negative co-movement. The number of categories is also extended to
analyze extremes of co-movement. Since we are mainly interested in the evolution of the
0
eβj xt
P rob(Φt = j) = P2 (4)
βk0 xt
k=0 e
where Φt is the co-movement at time t, j denotes the category, xt is the vector of exoge-
nous variables and βj is a parameter vector to be estimated. Category 0 is the case where
’no co-movement’ at time t occurs, category 1 represents the case in which there is positive
tor xt consists of a constant, a trend variable15 to capture the evolution of the probabilities
through time and dummy variables that capture the three main crisis periods as defined
above.
If the categories include lower (upper) extremes of the co-movement distribution, the
probability given by equation (4) can also be interpreted as an estimate of lower (upper)
tail dependence.16 Substituting the categories j in equation (4) by a certain value a yields
0
eβj xt
P rob(Φt ≤ a) = P rob(ri ≤ a|rj ≤ a∀j =
6 i) = P2 (5)
βk0 xt
k=0 e
which is equal to lower tail dependence if the scalar a is sufficiently small or if u → 0 for
a = FΦ−1 (u).
A model that estimates lower and upper extremes of the co-movement distribution is
estimated below. Given that co-movement smaller than a certain value a is equivalent to
15
Longin and Solnik (1995) are using a similar specification but are risking an indefinite covariance matrix
since they use a Multivariate GARCH model.
16
An introduction to tail dependence can be found in Joe (1997) for example.
17
the probability that the underlying returns are jointly smaller than this value a, equation
where H denotes the joint distribution function of the returns, C is the copula function
(see Nelson, 1999 for an introduction to copulas) and Fri is the marginal distribution func-
tion of return i. It can be shown that the copula to compute the probability of co-movement
We estimate the model given by equation (4) and (5) by minimizing the following log-
likelihood function17 :
T X
X 2
ln L = dtj lnP rob(Φt = j) (7)
t=1 j=0
We are aware of the difficulty of the interpretation of the parameter estimates since
they do not represent the marginal effects (see Greene, 2002). Therefore we focus on the
probability estimates rather than the parameter estimates. A graphical exploration of the
We first report the results of the specification with a trend and the dummy variables
for two categories (positive and negative co-movement) and then report results for an aug-
estimates is reported in separate figures for each portfolio where the left panel represents
the results of the first specification with two categories and the right panel is a plot of
the probability estimates for the second specification with four categories. We report the
significance of the parameter estimates but not the estimation results in general.18
The results for the 4 market sample show that the probability of positive co-movement
is larger than the probability of negative co-movement. Furthermore, there are positive
17
We use a MATLAB program to obtain the estimates.
18
Full results can be obtained from the author.
18
trends for both categories but only significant for the negative co-movement. Figure 8 is
a plot of the probabilities for the three categories through time. The figure particularly
clarifies the declining probability of the occurrence of ’no co-movements’ which is equal to
The results for the European sample are mainly similar. However, the trend is signif-
icant in both cases and clearly stronger for positive co-movements. The associated plots
of the probabilities in figure 9 also show that the probability of ’no-co-movement’ declines
through time.
The Asian market sample is different to the previous results in some respects. First,
the probability of positive co-movement is declining and the probability of negative co-
movement is increasing. Second, the trend variable is not significant for both categories.
This results in almost constant probabilities for ’no co-movement’ shown by figure 10.
The sample consisting of the EURO markets shows positive and significant trends for
both categories. Figure 11 also shows that the probability of positive co-movement is larger
than the probability of negative co-movement and that the gap between the two probabili-
The sample comprising all eleven markets exhibit a positive and significant trend of
figure 12.
The effect of the dummy variables capturing the crisis periods is very similar among
the portfolios. The probability of negative co-movement is always increasing and the prob-
ability of positive co-movement is decreasing in all crisis periods and for all portfolios.
However, the decrease of the probability of positive co-movement is stronger than the in-
crease of the probability of negative co-movement in the first crisis period leading to a
higher probability of ’no co-movement’ in this crisis period. This result is in contrast to the
19
common finding that the co-movement always increases in crisis periods.
A summary of the results could be condensed to the fact that the co-movement has in-
creased for all ’portfolios’ of markets analyzed and that negative co-movement is generally
less probable than positive co-movement. It is important to note that this does not mean
that negative co-movement is less pronounced than positive co-movement. Hence, this re-
sults is not in contrast to the conclusions drawn from the skewness of the co-movement in
Due to the very simple specification, the R2 is very low. However, the likelihood ratio
tests clearly indicate the joint significance of the model parameters. The Asian sample is
an exception which is consistent with the insignificant estimates for the trend variable.
Now, we extend the number of categories to capture extreme co-movements. We use the
3 and 4, respectively) and restrict the first two categories to values not including these
extremes. In this specification significant results are only obtained for the European and
EURO market sample implying higher probabilities for extreme negative and positive co-
movements. There is no significant effect for the other portfolios. The probability estimates
The fact that European markets are different to the other portfolios can either be ex-
plained with their geographical proximity and economic interdependence or their common
currency relevant for the end of the sample. Assumed that it is the single currency that
is causing more extreme co-movements compared to other portfolios would suggest that
20
5 Conclusions
This paper introduces a definition of co-movement with a closely related measure that has
many advantages in comparison to the correlation coefficient and also provides results
that are in accordance with previous findings in the literature and economic intuition, e.g.
the fact that negative co-movements are more pronounced than positive co-movements and
econometric models such as Multivariate GARCH models this paper can be viewed as
markets.
The results found for the European markets sharing the EURO currency suggest that
exchange rates play a crucial role for normal and extreme co-movements. Future research
could further investigate the question how institutional arrangements affect joint market
movements.
21
6 References
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Bae, K.H., Karolyi, G. A., Stulz, R. M., 2003, A New Approach to Measuring Financial
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Boyer, B. H., Gibson, M. S., Loretan, M, 1999, Pitfalls in Tests for Changes in Correla-
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Forbes, K., Rigobon, R., 2002, No Contagion, Only Interdependence: Measuring Stock
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Hu, L., 2002, Dependence Patterns across Financial Markets: Methods and Evidence,
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23
7 Appendix
The probability of common market movement below a value a can be written as follows:
where H is the joint distribution function, C is the copula function (see Nelson, 1999 for
The following equation shows that the probability of co-movement is based on the
T
1X
P rob(Φt ≤ a) = P rob(ri ≤ a∀i) = I(Φt (r1t , ..., rN t ) ≤ a) = min(Fri (a)∀i) (9)
T
t=1
where I is an indicator variable equal to one if Φt is not zero and the expression min is
the copula function which is the Frechet upper bound (see Nelsen, 1999 for further details).
24
4 4 0.5
2
2 0
0
0 −0.5
−2
−2 −4 −1
0 500 1000 0 500 1000 0 500 1000
4 4 2
2 2 1
0 0 0
−2 −2 −1
−4 −4 −2
0 500 1000 0 500 1000 0 500 1000
2 4 0.5
1 2
0
0 0
−0.5
−1 −2
−2 −4 −1
0 500 1000 0 500 1000 0 500 1000
2 4 2
1 2 1
0 0 0
−1 −2 −1
−2 −4 −2
0 500 1000 0 500 1000 0 500 1000
25
4
−2
−4
0 100 200 300 400 500 600 700 800 900 1000
−1
−2
0 100 200 300 400 500 600 700 800 900 1000
0.5
−0.5
−1
0 100 200 300 400 500 600 700 800 900 1000
0.8
0.6
0.4
0.2
−0.2
−0.4
−0.6
0 45 70 100 150 200214 250 300 331 350 400
October 1987 Asian Crisis (July 1997)
Oil Crisis (October 1973)
26
3
France
UK
US
2
−1
−2
−3
−4
0 50 100 150 200 250 300 350 400
200
France
180 UK
US
160
140
120
100
80
60
40
20
0
−4 −3 −2 −1 0 1 2 3
27
4 markets European markets
2 2
1
0
0
−2
−1
−4 −2
0 4570 214 300331 400 0 4570 214 331 400
Asian markets EURO markets
2 2
1
0
0
−2
−1
−2 −4
0 4570 214 331 400 0 4570 214 331 400
all markets
1
−1
−2
0 4570 214 331 400
28
fitted probabilities (MLogit) fitted probabilities (MLogit)
1 0.9
Prob no comovement Prob no comovement
Prob categ1 Prob categ1
0.9 Prob categ2 0.8 Prob categ2
Prob categ3
Prob categ4
0.8
0.7
0.7
0.6
0.6
0.5
0.5
0.4
0.4
0.3
0.3
0.2
0.2
0.1 0.1
0 0
0 50 100 150 200 250 300 350 400 0 50 100 150 200 250 300 350 400
0.7
0.6
0.6
0.5
0.5
0.4
0.4
0.3
0.3
0.2
0.2
0.1 0.1
0 0
0 50 100 150 200 250 300 350 400 0 50 100 150 200 250 300 350 400
0.7 0.5
0.6
0.4
0.5
0.3
0.4
0.3
0.2
0.2
0.1
0.1
0 0
0 50 100 150 200 250 300 350 400 0 50 100 150 200 250 300 350 400
29
fitted probabilities (MLogit) fitted probabilities (MLogit)
1 0.8
Prob no comovement Prob no comovement
Prob categ1 Prob categ1
0.9 Prob categ2 Prob categ2
0.7 Prob categ3
Prob categ4
0.8
0.6
0.7
0.5
0.6
0.5 0.4
0.4
0.3
0.3
0.2
0.2
0.1
0.1
0 0
0 50 100 150 200 250 300 350 400 0 50 100 150 200 250 300 350 400
0.7 0.7
0.6 0.6
0.5 0.5
0.4 0.4
0.3 0.3
0.2 0.2
0.1 0.1
0 0
0 50 100 150 200 250 300 350 400 0 50 100 150 200 250 300 350 400
30