Modeling threshold effects in stock price co movements: a vector nonlinear cointegration approach
This paper studies the hypothesis of stock price comovements between the US market and three different regions [the G6, BRICS and MENA (Middle East North Africa) during calm and crisis periods. It extends the study by (Chlibi, S. F. Jawadi, and M. Sellami. 2016. "Analyzing Heterogeneous Stock Price Comovements through Hybrid Approaches." Open Economies Review 27: 541 559) and models stock price comovements in a nonlinear multivariate framework. In particular, we develop an empirical nonlinear specification to model heterogeneity in stock price comovements, based on the multivariate threshold cointegration framework of (Hansen, B. E. and B. Seo. 2002. "Testing For Two Regime Threshold Cointegration in Vector Error Correction Models." Journal of Econometrics 110: 293 318) Our findings point to the presence of significant threshold cointegration relationships that are activated per regime. Specification of these threshold effects in stock price comovements is particularly useful to help investors to rebalance and adjust their portfolios so as to optimize their investment and diversification strategies.