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Is the covariance of international stock market returns regime dependent?

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  • Christian Jochum
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    Abstract

    The application of a SWARCH model to stock market returns allows one to endogenously determine the regime dependence of the stock market volatility. Comparison of the results from a sample of daily data from five major stock markets shows that the majority of the markets switch regimes simultaneously. This fact is used to investigate the relation between market volatility and the behaviour of the variance—;covariance matrix. It is found that the international variance—;covariance matrix is not stable and that changes in the matrix are dependent on the volatility regime. A high level of variance causes an increase in the average correlation coefficient. The co-movement of the markets is further described by a steady increase in the covariance over the whole sample period. It can be shown that both the time component and the regime dependence of the average correlation have separate and significant explanatory power.

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    File URL: http://www.tandfonline.com/doi/abs/10.1080/13518470010042210
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    Bibliographic Info

    Article provided by Taylor & Francis Journals in its journal The European Journal of Finance.

    Volume (Year): 7 (2001)
    Issue (Month): 3 ()
    Pages: 247-268

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    Handle: RePEc:taf:eurjfi:v:7:y:2001:i:3:p:247-268

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    Web page: http://www.tandfonline.com/REJF20

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    Related research

    Keywords: Swarch Correlation International Financial Markets;

    References

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    1. Lawrence R. Glosten & Ravi Jagannathan & David E. Runkle, 1993. "On the relation between the expected value and the volatility of the nominal excess return on stocks," Staff Report 157, Federal Reserve Bank of Minneapolis.
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    Cited by:
    1. Cifarelli, Giulio & Paladino, Giovanna, 2005. "Volatility linkages across three major equity markets: A financial arbitrage approach," Journal of International Money and Finance, Elsevier, vol. 24(3), pages 413-439, April.

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