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MODELING INTERNATIONAL STOCK PRICE COMOVEMENTS WITH HIGH-FREQUENCY DATA

  • Hachmi Ben Ameur (a1), Fredj Jawadi (a2), Wael Louhichi (a3) and Abdoulkarim Idi Cheffou (a4)
Abstract

This paper studies stock price comovements in two key regions [the United States and Europe, which is represented by three major European developed countries (France, Germany, and the United Kingdom)]. Our paper uses recent high-frequency data (HFD) and investigates price comovements in the context of “normal times” and crisis periods. To this end, we applied a non-Gaussian Asymmetrical Dynamic Conditional Correlation (ADCC)-GARCH (Generalized Autoregressive Conditional Heteroscedasticity) model and the Marginal Expected Shortfall (MES) approach. This choice has three advantages: (i) With the development of high-frequency trading (HFT), it is more appropriate to use HFD to test price linkages for overlapping and nonoverlapping data. (ii) The ADCC-GARCH model captures further asymmetry in price comovements. (iii) The use of the MES enables to measure systemic risk contributions around the distribution tails. Accordingly, we offer two interesting findings. First, while the hypothesis of asymmetrical and time-varying stock return linkages is not rejected, the MES approach indicates that both European and US indices make a considerable contribution to each other's systemic risk, with significant input from Frankfurt to the French and US markets, especially following the collapse of Lehman Brothers. Second, we show that the propagation of systemic risk is higher during the crisis period and overlapping trading hours than during nonoverlapping hours. Thus, the MES test is recommended as an indicator to help monitor market exposure to systemic risk and to gauge expected losses for other markets.

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Corresponding author
Address correspondence to: Hachmi Ben Ameur, INSEEC Business School, 27 avenue Claude Vellefaux 75010 Paris, France; e-mail: hbenameur@inseec.com.
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We would like to thank two anonymous referees and Marc Paolella for their constructive comments on an earlier version of this paper. We also thank Ramo Gencay, Esfandiar Maasoumi, Dennis Kristensen, Timo Teräsvirta, Ruey Tsay, and the participants of the Second International Workshop on “Financial Markets and Nonlinear Dynamics” (Paris, June 4 and 5, 2015) for their helpful comments.

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Macroeconomic Dynamics
  • ISSN: 1365-1005
  • EISSN: 1469-8056
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