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Is the covariance of international stock market returns regime dependent?

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Author Info
Christian Jochum
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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Article provided by Taylor and Francis Journals in its journal The European Journal of Finance.

Volume (Year): 7 (2001)
Issue (Month): 3 (September)
Pages: 247-268
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Handle: RePEc:taf:eurjfi:v:7:y:2001:i:3:p:247-268

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Keywords: Swarch Correlation International Financial Markets;

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