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What Drives International Equity Correlations? Volatility or Market Direction?

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  • Khaled Amira

    ()

  • Abderrahim Taamouti

    ()

  • Georges Tsafack

    ()

Abstract

We consider impulse response functions to study the impact of both return and volatility on correlation between international equity markets. Using data on US (as the reference country), Canada, UK and France equity indices, empirical evidence shows that without taking into account the effect of return, there is an (asymmetric) effect of volatility on correlation. The volatility seems to have an impact on correlation especially during downturn periods. However, once we introduce the effect of return, the impact of volatility on correlation disappears. These observations suggest that, the relation between volatility and correlation is an association rather than a causality. The strong increase in the correlation is driven by the past of the return and the market direction rather than the volatility.

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Bibliographic Info

Paper provided by Universidad Carlos III, Departamento de Economía in its series Economics Working Papers with number we094122.

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Date of creation: Jun 2009
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Handle: RePEc:cte:werepe:we094122

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Keywords: International equity markets; Asymmetric volatility; Asymmetric correlation; Vector autoregressive (VAR); DCC-GARCH; Generalized impulse response function; Granger causality;

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Cited by:
  1. Afonso, António & Gomes, Pedro & Taamouti, Abderrahim, 2014. "Sovereign credit ratings, market volatility, and financial gains," Working Paper Series 1654, European Central Bank.
  2. repec:ipg:wpaper:28 is not listed on IDEAS
  3. Marc Joëts, 2012. "Energy price transmissions during extreme movements," EconomiX Working Papers 2012-38, University of Paris West - Nanterre la Défense, EconomiX.

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