Purpose – The paper seeks to investigate conditional correlations and conditional volatility spillovers across international stock markets and industrial sectors from the perspective of the UK investor. Design/methodology/approach – Utilizing the DCC model, the paper extracts the time-varying conditional correlations between the UK, US and European stock markets and industrial sectors. It also uses the multivariate generalized autoregressive conditional heteroscedasticity (MVGARCH) to assess the transmission of volatility from the US and European stock markets to the UK. Findings – The findings suggest that the UK equity market is more integrated with Europe, in terms of both aggregate stock markets and sectors. Correlations are higher during bear markets and tend to fall during periods of recovery. The sectoral analysis also provides interesting insights into the dynamics of volatility transmission across sectors. Research limitations/implications – The results suggest that the search for a better understanding of the dynamics of correlations between markets and sectors must continue. Practical implications – The investigation raises interesting questions for investors and regulators, as well as theoretical finance. For example, the finding that correlations increase in bear markets suggests that hedging strategies need to be revisited. The existence of sectoral idiosyncratic volatility offers further evidence that arbitrage may at times become more risky and thus limited. Originality/value – The findings from analysing both market-wide and sectoral integration raises the overarching question of whether studies of market integration and portfolio diversification, as well as the authorities overseeing financial stability, should be focusing on sectoral rather than market-wide analysis.
|Number of pages||22|
|Publication status||Published - 2007|