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Stochastic Correlation Across International Stock Markets

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Author Info
Clifford Ball (Owen Graduate School of Management, Vanderbilt University)
Walter Torous (Anderson School of Management)
Abstract

This paper examines the correlation across a number of international stock market indices. As correlation is not observable, we assume it to be a latent variable whose dynamics must be estimated using data on observables. To do so, we use ¯ltering methods to extract stochastic correlation from returns data. We ¯nd evidence that the estimated correlation structure is dynamically changing over time. We also investigate the link between stochastic correlation and volatility. In general, stochastic correlation tends to increase in response to higher volatility but the e®ect is by no means consistent. These results have important implications for portfolio theory as well as risk management.

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File URL: http://repositories.cdlib.org/cgi/viewcontent.cgi?article=1063&context=anderson/fin
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Paper provided by Anderson Graduate School of Management, UCLA in its series University of California at Los Angeles, Anderson Graduate School of Management with number 1063.

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Date of creation: 07 Jun 2000
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Handle: RePEc:cdl:anderf:1063

Note: oai:cdlib1:anderson/fin-1063
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Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

  1. Kroner, Kenneth F & Ng, Victor K, 1998. "Modeling Asymmetric Comovements of Asset Returns," Review of Financial Studies, Oxford University Press for Society for Financial Studies, vol. 11(4), pages 817-44.
  2. Neil Shephard, 2005. "Stochastic Volatility," Economics Papers 2005-W17, Economics Group, Nuffield College, University of Oxford. [Downloadable!]
  3. Andrew Ang & Geert Bekaert, 1998. "Regime Switches in Interest Rates," NBER Working Papers 6508, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  4. Clifford A. Ball & Walter N. Torous, 1999. "The Stochastic Volatility of Short-Term Interest Rates: Some International Evidence," Journal of Finance, American Finance Association, vol. 54(6), pages 2339-2359, December. [Downloadable!] (restricted)
  5. Nelson, Daniel B, 1991. "Conditional Heteroskedasticity in Asset Returns: A New Approach," Econometrica, Econometric Society, vol. 59(2), pages 347-70, March. [Downloadable!] (restricted)
  6. Ramchand, Latha & Susmel, Raul, 1998. "Volatility and cross correlation across major stock markets," Journal of Empirical Finance, Elsevier, vol. 5(4), pages 397-416, October. [Downloadable!] (restricted)
  7. Ghysels, E. & Harvey, A. & Renault, E., 1995. "Stochastic Volatility," Papers 95.400, Toulouse - GREMAQ.
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  8. Bollerslev, Tim, 1986. "Generalized autoregressive conditional heteroskedasticity," Journal of Econometrics, Elsevier, vol. 31(3), pages 307-327, April. [Downloadable!] (restricted)
  9. Kim, Sangjoon & Shephard, Neil & Chib, Siddhartha, 1998. "Stochastic Volatility: Likelihood Inference and Comparison with ARCH Models," Review of Economic Studies, Blackwell Publishing, vol. 65(3), pages 361-93, July. [Downloadable!] (restricted)
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  10. Engle, Robert F, 1982. "Autoregressive Conditional Heteroscedasticity with Estimates of the Variance of United Kingdom Inflation," Econometrica, Econometric Society, vol. 50(4), pages 987-1007, July. [Downloadable!] (restricted)
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  1. Andrea Beltratti & Claudio Morana, 2006. "Comovements in International Stock Markets," ICER Working Papers 3-2006, ICER - International Centre for Economic Research. [Downloadable!]
  2. Caiado, Jorge & Crato, Nuno, 2007. "A GARCH-based method for clustering of financial time series: International stock markets evidence," MPRA Paper 2074, University Library of Munich, Germany. [Downloadable!]
  3. Rachel Campbell & Catherine S. Forbes & Kees Koedijk & Paul Kofman, 2003. "Diversification Meltdown or the Impact of Fat tails on Conditional Correlation?," Monash Econometrics and Business Statistics Working Papers 18/03, Monash University, Department of Econometrics and Business Statistics. [Downloadable!]
  4. Robert-Paul Berben & W. Jos Jansen, 2005. "Bond Market and Stock Market Integration in Europe," DNB Working Papers 060, Netherlands Central Bank, Research Department. [Downloadable!]
  5. Caiado, Jorge & Crato, Nuno & Peña, Daniel, 2007. "Is there an identity within international stock market volatilities?," MPRA Paper 2069, University Library of Munich, Germany. [Downloadable!]
  6. Claudio Morana, 2006. "International Stock Markets Comovements: the Role of Economic and Financial Integration," ICER Working Papers 25-2006, ICER - International Centre for Economic Research. [Downloadable!]
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