Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/166740 
Year of Publication: 
2016
Series/Report no.: 
Working Paper No. 1616
Publisher: 
Koç University-TÜSİAD Economic Research Forum (ERF), Istanbul
Abstract: 
Cycles in the behavior of stock markets have been widely documented. There is an increasing body of literature on whether stock markets anticipate business cycles or its turning points. Several recent studies assert that financial integration impacts positively on business cycle comovements of economies. We consider three Western equity markets, represented by their respective stock indices: DJIA (USA), FTSE 100 (UK), and Euro Stoxx 50 (euro area). Connecting these three markets together via vector autoregressive processes in index returns, we construct "propagation values" to measure and trace, on a daily basis, the relative importance of a market as a volatility creator within the network, where volatility is due to a return shock in a market. A cross-wavelet analysis reveals the joint frequency structure of pairs of the propagation value series, in particular whether or not two series tend to move in the same direction at a given frequency. Our main findings are: (i) From 2001 onwards, the daily propagation values of markets have been fluctuating much less than before, and high frequencies have become less pronounced; (ii) the European markets are in phase at business cycle frequency, while the US market is not in phase with either European market; (iii) in 2008, the euro area has taken over the leading role. This approach not only provides new insight into the time-dependent interplay of equity markets, but it can also replicate certain findings of traditional business cycle research, and it has the advantage of using only readily available stock market data.
Subjects: 
equity market network
propagation value
cycle
synchronization
wavelet analysis
phase difference
JEL: 
C32
C58
E32
F44
G15
Document Type: 
Working Paper

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