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Extreme Correlation of International Equity Markets

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  • Solnik, Bruno H
  • Longin, François

Abstract

Testing the hypothesis that international equity market correlation increases in volatile times is a difficult exercise and misleading results have often been reported in the past because of a spurious relationship between correlation and volatility. This paper focuses on extreme correlation, that is to say the correlation between returns in either the negative or positive tail of the multivariate distribution. Using ?extreme value theory? to model the multivariate distribution tails, we derive the distribution of extreme correlation for a wide class of return distributions. Using monthly data on the five largest stock markets from 1958 to 1996, we reject the null hypothesis of multivariate normality for the negative tail, but not for the positive tail. We also find that correlation is not related to market volatility per se but to the market trend. Correlation increases in bear markets, but not in bull markets.

Suggested Citation

  • Solnik, Bruno H & Longin, François, 2000. "Extreme Correlation of International Equity Markets," CEPR Discussion Papers 2538, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:2538
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    Cited by:

    1. Morana, Claudio & Beltratti, Andrea, 2008. "Comovements in international stock markets," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 18(1), pages 31-45, February.
    2. Michael Rockinger & Eric Jondeau, 2001. "Conditional Dependency of Financial Series: An Application of Copulas," Working Papers hal-00601478, HAL.
    3. Claudio Morana, 2008. "International stock markets comovements: the role of economic and financial integration," Empirical Economics, Springer, vol. 35(2), pages 333-359, September.
    4. Sakho, Yaye Seynabou, 2006. "Contagion and firms'internationalization in Latin America : evidence from Mexico, Brazil, and Chile," Policy Research Working Paper Series 4076, The World Bank.
    5. Packham, Natalie & Woebbeking, Fabian, 2018. "A factor-model approach for correlation scenarios and correlation stress-testing," IRTG 1792 Discussion Papers 2018-034, Humboldt University of Berlin, International Research Training Group 1792 "High Dimensional Nonstationary Time Series".
    6. Rockinger, Michael & Poon, Ser-Huang & Tawn, Jonathan, 2001. "New Extreme-Value Dependence Measures and Finance Applications," CEPR Discussion Papers 2762, C.E.P.R. Discussion Papers.
    7. Y. K. Tse & Albert K. C. Tsui, 2000. "A Multivariate GARCH Model with Time-Varying correlations," Econometrics 0004010, University Library of Munich, Germany.
    8. P. Hartmann & S. Straetmans & C. G. de Vries, 2004. "Asset Market Linkages in Crisis Periods," The Review of Economics and Statistics, MIT Press, vol. 86(1), pages 313-326, February.
    9. Morana, Claudio & Beltratti, Andrea, 2002. "The effects of the introduction of the euro on the volatility of European stock markets," Journal of Banking & Finance, Elsevier, vol. 26(10), pages 2047-2064, October.
    10. Ekaterina Dorodnykh, 2013. "What Drives Stock Exchange Integration?," International Journal of Business and Economic Sciences Applied Research (IJBESAR), International Hellenic University (IHU), Kavala Campus, Greece (formerly Eastern Macedonia and Thrace Institute of Technology - EMaTTech), vol. 6(2), pages 47-79, September.
    11. Gregory R. Duffee, 2001. "Asymmetric cross-sectional dispersion in stock returns: evidence and implications," Working Paper Series 2000-18, Federal Reserve Bank of San Francisco.
    12. Ekaterina Dorodnykh, 2014. "Determinants of stock exchange integration: evidence in worldwide perspective," Journal of Economic Studies, Emerald Group Publishing, vol. 41(2), pages 292 - 316, March.

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    More about this item

    Keywords

    International equity markets; Volatility; Correlation; Extreme value theory;
    All these keywords.

    JEL classification:

    • F30 - International Economics - - International Finance - - - General
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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