Correlation structure of extreme stock returns
AbstractIt is commonly believed that the correlations between stock returns increase in high volatility periods. We investigate how much of these correlations can be explained within a simple non-Gaussian one-factor description with time independent correlations. Using surrogate data with the true market return as the dominant factor, we show that most of these correlations, measured by a variety of different indicators, can be accounted for. In particular, this one-factor model can explain the level and asymmetry of empirical exceedance correlations. However, more subtle effects require an extension of the one factor model, where the variance and skewness of the residuals also depend on the market return.
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Bibliographic InfoPaper provided by arXiv.org in its series Papers with number cond-mat/0006034.
Date of creation: Jun 2000
Date of revision: Jan 2001
Publication status: Published in Quantitative Finance 1 217-222 (2001)
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Web page: http://arxiv.org/
Other versions of this item:
- G1 - Financial Economics - - General Financial Markets
- G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
- G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
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