Extreme Correlation of International Equity Markets
AbstractTesting 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.
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Bibliographic InfoPaper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 2538.
Date of creation: Aug 2000
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Find related papers by JEL classification:
- F30 - International Economics - - International Finance - - - General
- G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
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