Identification of Global and Local Shocks in International Financial Markets via General Dynamic Factor Models

Barigozzi, Matteo and Hallin, Marc and Soccorsi, Stefano (2019) Identification of Global and Local Shocks in International Financial Markets via General Dynamic Factor Models. Journal of Financial Econometrics, 17 (3). pp. 462-494. ISSN 1479-8409

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Abstract

We employ a two-stage general dynamic factor model to analyze co-movements between returns and between volatilities of stocks from the U.S., European, and Japanese financial markets. We find two common shocks driving the dynamics of volatilities—one global shock and one United States–European shock—and four local shocks driving returns, but no global one. Co-movements in returns and volatilities increased considerably in the period 2007–2012 associated with the Great Financial Crisis and the European Sovereign Debt Crisis. We interpret this finding as the sign of a surge, during crises, of interdependencies across markets, as opposed to contagion. Finally, we introduce a new method for structural analysis in general dynamic factor models which is applied to the identification of volatility shocks via natural timing assumptions. The global shock has homogeneous dynamic effects within each individual market but more heterogeneous effects across them, and is useful for predicting aggregate realized volatilities.

Item Type:
Journal Article
Journal or Publication Title:
Journal of Financial Econometrics
Additional Information:
This is a pre-copy-editing, author-produced PDF of an article accepted for publication in Journal of Financial Econometrics following peer review. The definitive publisher-authenticated version Matteo Barigozzi, Marc Hallin, Stefano Soccorsi, Identification of Global and Local Shocks in International Financial Markets via General Dynamic Factor Models, Journal of Financial Econometrics, Volume 17, Issue 3, Summer 2019, Pages 462–494, https://doi.org/10.1093/jjfinec/nby006 is available online at: https://academic.oup.com/jfec/article/17/3/462/4915925
Uncontrolled Keywords:
/dk/atira/pure/subjectarea/asjc/2000/2002
Subjects:
ID Code:
125271
Deposited By:
Deposited On:
22 May 2018 15:02
Refereed?:
Yes
Published?:
Published
Last Modified:
26 Sep 2020 05:15