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Measuring market integration during crisis periods

Measuring market integration during crisis periods
Measuring market integration during crisis periods
Pukthuanthong and Roll (2009) measure the degree of market integration by the percentage of a market’s returns explained by global risk factors. However, during periods of crisis characterised by high volatility, their measure may be biased. This paper investigates the determinants of the explanatory power in a multi-factor model during global crises. We show that the explanatory power is influenced by factor heteroscedasticity, changes in factor loadings and residual heteroscedasticity. Using a counterfactual analysis, we establish an empirical framework to examine the effects of each element on integration for 53 financial markets during six recent crisis periods. We find the unconditional market integration is much lower for most markets during a period of crisis than implied. Both factor heteroscedasticity and the existence of contagion during crises account for this difference.
Contagion, Factor heteroscedasticity, Financial crisis, Market integration
1042-4431
Qin, Weiping
3e8d75f0-72bb-4ac5-8301-51633cc0eb16
Cho, Sungjun
9f1da7dd-769b-40d2-826d-06d4da3f5399
Hyde, Stuart
250c8794-2190-4b3e-83c6-7c6f40698d72
Qin, Weiping
3e8d75f0-72bb-4ac5-8301-51633cc0eb16
Cho, Sungjun
9f1da7dd-769b-40d2-826d-06d4da3f5399
Hyde, Stuart
250c8794-2190-4b3e-83c6-7c6f40698d72

Qin, Weiping, Cho, Sungjun and Hyde, Stuart (2022) Measuring market integration during crisis periods. Journal of International Financial Markets, Institutions and Money, 78, [101555]. (doi:10.1016/j.intfin.2022.101555).

Record type: Article

Abstract

Pukthuanthong and Roll (2009) measure the degree of market integration by the percentage of a market’s returns explained by global risk factors. However, during periods of crisis characterised by high volatility, their measure may be biased. This paper investigates the determinants of the explanatory power in a multi-factor model during global crises. We show that the explanatory power is influenced by factor heteroscedasticity, changes in factor loadings and residual heteroscedasticity. Using a counterfactual analysis, we establish an empirical framework to examine the effects of each element on integration for 53 financial markets during six recent crisis periods. We find the unconditional market integration is much lower for most markets during a period of crisis than implied. Both factor heteroscedasticity and the existence of contagion during crises account for this difference.

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Qin, et al._2022_Market Integration_JIFMIM - Accepted Manuscript
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More information

Accepted/In Press date: 21 March 2022
e-pub ahead of print date: 26 March 2022
Published date: 1 May 2022
Keywords: Contagion, Factor heteroscedasticity, Financial crisis, Market integration

Identifiers

Local EPrints ID: 472593
URI: http://eprints.soton.ac.uk/id/eprint/472593
ISSN: 1042-4431
PURE UUID: 22731f66-5b6c-4d95-80de-efb7a51eb98b

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Date deposited: 09 Dec 2022 17:38
Last modified: 26 Mar 2024 05:01

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Contributors

Author: Weiping Qin
Author: Sungjun Cho
Author: Stuart Hyde

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