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What drives international equity correlations? Volatility or market direction?

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  • Amira, Khaled
  • Taamouti, Abderrahim
  • Tsafack, Georges

Abstract

We consider impulse response functions to study the impact of both return and volatility on the correlation between international equity markets. Using data on the US (as the reference country), Canada, the UK and France equity indices, empirical evidence shows that without taking into account the effect of return, there is an (asymmetric) effect of volatility on correlation. The volatility seems to have an impact on correlation especially during downturn periods. However, once we introduce the effect of return, the impact of volatility on correlation disappears. These observations suggest that, the relation between volatility and correlation is an association rather than a causality. The strong increase in the correlation is driven by the past of the return and the market direction rather than the volatility.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of International Money and Finance.

Volume (Year): 30 (2011)
Issue (Month): 6 (October)
Pages: 1234-1263

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Handle: RePEc:eee:jimfin:v:30:y:2011:i:6:p:1234-1263

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Web page: http://www.elsevier.com/locate/inca/30443

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Keywords: International equity markets Asymmetric volatility Asymmetric correlation Estimation error Vector autoregressive (VAR) DCC-GARCH Generalized impulse response function Granger causality;

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Cited by:
  1. repec:ipg:wpaper:28 is not listed on IDEAS
  2. Afonso, António & Gomes, Pedro & Taamouti, Abderrahim, 2014. "Sovereign credit ratings, market volatility, and financial gains," Computational Statistics & Data Analysis, Elsevier, vol. 76(C), pages 20-33.
  3. Marc Joëts, 2012. "Energy price transmissions during extreme movements," EconomiX Working Papers 2012-38, University of Paris West - Nanterre la Défense, EconomiX.

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