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The Impact of Large Changes in Asset Prices on Intra-Market Correlations in the Domestic and International Markets

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  • Ehud I. Ronn
  • Akin Sayrak
  • Stathis Tompaidis
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    Abstract

    We consider the impact of "large" changes in asset prices on intra-market correlations in domestic and international markets. Assuming normally distributed asset returns, we show that the absolute magnitude of the correlation, conditional on a change is greater than or equal to a given absolute size of one of the variables, is monotonically increasing in the magnitude of that absolute change. Empirical tests using domestic and international-market data support this theoretical result. These results have significant implications for portfolio management, hedging interest rate risk, tests of asset pricing models, Roll's concern with asset pricing models' explanatory power, and implementation of Value-at-Risk. Copyright (c) 2009, The Eastern Finance Association.

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    Bibliographic Info

    Article provided by Eastern Finance Association in its journal Financial Review.

    Volume (Year): 44 (2009)
    Issue (Month): 3 (08)
    Pages: 405-436

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    Handle: RePEc:bla:finrev:v:44:y:2009:i:3:p:405-436

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    Web page: http://www.easternfinance.org/
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    Cited by:
    1. Urbina, Jilber, 2013. "Contagion or Interdependence in the recent Global Financial Crisis? An application to the stock markets using unconditional cross-market correlations," Working Papers 2072/211884, Universitat Rovira i Virgili, Department of Economics.
    2. You, Leyuan & Daigler, Robert T., 2010. "Is international diversification really beneficial?," Journal of Banking & Finance, Elsevier, vol. 34(1), pages 163-173, January.

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