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What drives cross-market correlations during the United States Q.E.?

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  • Yip, Pick Schen
  • Brooks, Robert
  • Do, Hung Xuan
  • Vo, Xuan Vinh
Abstract
This paper investigates the dynamic cross-market correlations and its crucial drivers between the United States (U.S.) stock and currency market and foreign markets during the U.S. Quantitative Easing (QE) periods. We focus on countries with strong trade and financial linkages with the U.S., including Australia, Canada, and Mexico. Our empirical analyses deliver important findings. First, we consistently find positive (negative) correlations between the U.S. equity (currency) market and financial assets of the three foreign countries under the scenario of the U.S. QE. Second, the magnitude of the conditional correlations tends to be strengthened during the initiation of the U.S. QE1 but was weakened during the U.S. QE3. Lastly, we find that U.S. treasury yields and term premium were among the most significant economic drivers of the markets' linkages during both QE1 and QE3 but in an opposite role. Meanwhile, the expected uncertainty in the bond market additionally contributed to drive the markets' interrelationship during the QE2. Our findings deliver important information to investors and policymakers to anticipate the dynamics of market linkages under U.S. QE scenarios.

Suggested Citation

  • Yip, Pick Schen & Brooks, Robert & Do, Hung Xuan & Vo, Xuan Vinh, 2022. "What drives cross-market correlations during the United States Q.E.?," International Review of Financial Analysis, Elsevier, vol. 83(C).
    • Handle: RePEc:eee:finana:v:83:y:2022:i:c:s1057521922002721
    DOI: 10.1016/j.irfa.2022.102320
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    More about this item

    Keywords

    Quantitative easing; Cross-market correlation; DCC-GARCH; Dynamic spillovers;
    All these keywords.

    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • C5 - Mathematical and Quantitative Methods - - Econometric Modeling
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • O16 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment; Corporate Finance and Governance
    • F31 - International Economics - - International Finance - - - Foreign Exchange

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