Working Paper Series,
Stockholm School of Economics, China Economic Research Center

Abstract: This paper analyzes equity market movements in East Asia and Europe during the global financial crisis. Extending the methodology in Chakrabarti and Roll (2002), we study regional as well as country-regional volatility, covariance and correlation. We also analyze regional and country-regional tail dependence in the two regions. The results show that volatility and covariance patterns in East Asia and Europe were relatively stable until the second half of 2008. Correlations were higher in Europe, but relatively high in East Asia as well. Both regions thus exhibit an overall increase in comovements compared to the time of the Asian financial crisis. There was a sharp decline in regional correlation during the third quarter of 2008 in both East Asia and Europe, which was then followed by a strong increase. The spread of the crisis affected Europe more, with resulting higher regional comovements. Moreover, average tail dependence stayed relatively stable in both regions throughout the pre-crisis and crisis periods with a notably higher level of tail dependence in Europe. Surprisingly, countries in East Asia such as China that are usually seen as insulated from the rest of the region show signs of increasing market integration with the rest of the region. The increasing level of financial market integration and the high level of comovements during times of international financial turmoil demonstrate the limited benefit of diversification in regional portfolios.

Keywords: East Asia; Europe; Financial crisis; Financial integration; Correlation; Copula; Tail dependence

JEL-codes: F36; F41; G15

37 pages, January 1, 2010

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