Think of global equity markets as a network

 We have been spending more time thinking about markets as networks or clusters. Don’t think about asset returns in isolation, but through the connections across markets and regions. Some of the latest work in this is presented in the paper, “Clustred Network Connectedness: A New Measurment Framework with Applicaitons to Global Eqiuty Markets” by Buchwalter, Diebold, and Tilmaz. 

These authors have been working on the network process for asset returns through variance decomposition of VAR models. From these models, the authors have been able to distinguish causality from and to markets across a wide set of markets. Their latest work on global equity markets seeks to address econometric issues arising from the decomposition method. This process of decomposition will provide a different narrative but will also answer questions about whether there is contagion or just co-movement across the network. The graph above shows the traditional method for forming the clustered identification. The graph below looks at the same data, accounting for groupings within the network after accounting for generalized identification.

Note that in the clustered identification, the US equity market serve as the center of netwrok behavior while the generalized idienificaiton which accoutns for correlation within groupinsg of the 16 equity markets studied, shows the high connection that is the focus of the EU cluster. Both provide interesting interpretations for how equity markets are connected.