Sectors stock indices aggregate correlations and expectations: Evidence from the Greek stock market

Abstract

Based on the cyclical movements of the Athens Stock Market, the paper empirically examines the behavior of seven sectors (markets) namely: industry-services, emporium, construction, petroleum, telecommunications, food-beverages, and banks. Specifically using daily observations from January 2006 to August 2017, we estimate a dynamic equicorrelation multivariate GARCH model (DECO-MGARCH) developed by Engle and Kelly (2012), to analyze the dynamic behavior of these sectors. Furthermore, using time-dependent entropic measures we examine empirically the uncertainty (expectations) regarding the correlation behavior of these seven sectors. The empirical results are in line with previous findings (Tsai & Chen, 2010; Garnaut, 1998) and provide evidence supporting the view of high correlations during periods of crises. In addition, the dynamic entropy shows that the expectations of market participants were more concentrated (less spread out) during these periods of crises. Therefore, the empirical evidence of the paper supports the view that market participants share the same opinions (entropy exhibits low uncertainty) during crises and therefore are acting in a similar fashion (exhibiting high correlation).