Dynamics of global stock market correlations: the VIX and attention allocation

• Main Author: Özcan Ceylan
• Format: Article
• Language: English
• Published: Taylor & Francis Group 2021-01-01
• Series: Journal of Applied Economics
• Subjects: dynamic conditional correlations; return comovements; investor attention; vix index
• Online Access: http://dx.doi.org/10.1080/15140326.2021.1949257

This paper investigates the dynamics of international stock return correlations between the U.S., the U.K., Germany and France. Estimated correlations are modeled in an ARDL framework to evaluate how the market-wide uncertainty in the U.S. affects international stock market comovements. Results show that a shock to the VIX leads to increases in cross-county correlations in the following week and that the correlations tend to decline in the second week that follows the shock. The revealed time pattern of the effect of the VIX may be explained in a behavioral framework through investors’ attention reallocation mechanism.