Global Stock Indexes and Currency Risk

Global Stock Indexes and Currency Risk

Global stock indexes

The Global stock indexes are an important part of any portfolio and they are a vital factor in the success or failure of an investment. It is possible to buy and sell shares on the stock exchanges in different countries and it is also possible to invest in foreign currencies. However, it is crucial to remember that the risk involved with these investments is high. Thus, it is important to take into account factors such as currency volatility, the effect of the GFC, and the integration of the Chinese stock market.

China’s stock market integration

The Chinese stock market has recently become more integrated into the global economy. It is expected to attract more foreign investment, and also diversify portfolio risk. China’s stock market integration is a good indicator of its economic reforms.

Stock market integration is one of the most important aspects of regional economic integration. However, political conflicts have impeded the progress of this process. Thus, more studies have been devoted to the financial integration of East Asia. This paper explores the relationship between the co-movement between the stock markets of China, Japan and South Korea.

It uses a price-based measurement of integration to determine if the East Asian financial sector has become more globally integrated since the late 1990s. It empirically simulates a dynamic time-varying non-linear relationship between the stock markets of the three countries. Interestingly, this study finds that the financial integration of the East Asian region has been increasing over the past decade.

Volatility spillovers from the U.S. to the Chinese stock market

In light of the recent global financial crisis, investors have been looking at ways to mitigate portfolio risks. One way to do this is by diversifying from the established stock markets of developed countries to the emerging markets of China and India. But how does the risk of a volatile market spillover to these countries?

The US is one of the main sources of spillover effects. However, the US market has been a weak player in this market segment. A recent study by Su (2019) examined how volatility spillovers between G7 markets affected financial crises. He found that during a financial crisis, volatility spillovers jumped up.

Su (2020) used the dynamic equi-correlation model to determine how risk spillovers changed in the aftermath of a financial crisis. He also estimated directional spillovers for each market.

Other researchers have studied how volatility spillovers between stock markets can be influenced by macroeconomic conditions. Zhuo Huang, et al., compared the macroeconomic vulnerability of the United States and China. They also investigated the spillover effect of excess liquidity on developing countries.

Effects of the 2008 GFC on the relationships between international equity markets

The 2008 financial crisis was a devastating shock to the global economy. It resulted in a massive chain reaction that destroyed the global financial industry. It also increased the credit spread of non-investment grade debt and implied volatility for international oil. This created enormous economic uncertainty. In an effort to strengthen their balance sheets, financial institutions pulled money out of risky assets in advanced markets.

Global stock markets generally move in the same direction in periods of high economic uncertainty and pressure. This can lead to information spillovers that could manifest as bad news for other markets. During the global financial crisis, this phenomenon was more prominent.

There are several studies that have looked at how dependent an international equity market is on other stock markets. A number of studies find that the degree of connectedness is subject to crises.

The most notable is the case of the G7. The G7 group of countries — US, UK, Germany, France, Italy, and Japan — exhibits a strong relationship with other equity markets around the world.

Asset allocation strategies to give more weight to the Swiss Franc in global stock portfolios

There are many asset allocation strategies that one can use to give more weight to the Swiss Franc in global stock portfolios. As a currency, the Swiss Franc has become more attractive to investors as a result of the recent depreciation of the dollar. However, the Big Four currencies – the US dollar, the euro, the pound and the yen – remain dominant in the world economy. A number of nontraditional currencies have also shifted out of the Big Four, and have started to offer investors attractive volatility-adjusted returns.

The central banks of these countries have begun to invest more aggressively in managing the investment tranches of their portfolios. This may be a result of diverting reserves away from the Big Four currencies. Nevertheless, there are significant risks associated with the reserve currency bond yields of these countries, which can cause capital losses and changes in currency shares.


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