The transmission of shocks among S&P indexes

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Abstract:

Financial market participants pay particular attention to the behaviour of equity indexes due, in part, to the popularity of index investing and the reliance on market and sector indexes to evaluate managed portfolios. Five major S&P stock indexes are examined to determine their interrelationships and how shocks to one index are transmitted to the others. The paper employs the newly developed technique of generalized forecast error variance decomposition [Koop et al. (1996); Pesaran and Shin (1998)]. Unlike the traditional orthogonalized decomposition, the generalized version is invariant to the ordering of the variables in the underlying vector autoregression. The results provide important information about the transmission of shocks among these indexes.

Document Type: Research Article

DOI: http://dx.doi.org/10.1080/09603100110090172

Publication date: April 1, 2002

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