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Modelling the Time-Varying Correlations Between National Stock Market Returns

Author

Listed:
  • Ragunathan, V.
  • Mitchell, H.

Abstract

The analysis of correlations forms the basis of portfolio diversification and the lower the correlation between two assets, the greater the potential benefit to be obtained by diversification. In the international context , this typically involves the analyses of the correlation between the returns of national stock market indices. Erb, Harvey and Viskanta (1994) and Longin and Solnik (1995) have shown that these correlations tend to vary over the time according to the phases of business cycles. We extend this analysis by modelling time-varying correlations for the Morgan Stanley Capital International (MSCI) country indices using the Diagonal Vech parametrisation of the multivariate Generalised Autoregressive Conditional Heteroskedasticity (GARCH) model.

Suggested Citation

  • Ragunathan, V. & Mitchell, H., 1997. "Modelling the Time-Varying Correlations Between National Stock Market Returns," Papers 97-7, Melbourne - Centre in Finance.
    • Handle: RePEc:fth:melrfi:97-7
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    Cited by:

    1. Berdiev, Aziz N. & Chang, Chun-Ping, 2015. "Business cycle synchronization in Asia-Pacific: New evidence from wavelet analysis," Journal of Asian Economics, Elsevier, vol. 37(C), pages 20-33.
    2. d'Addona, Stefano & Kind, Axel H., 2006. "International stock-bond correlations in a simple affine asset pricing model," Journal of Banking & Finance, Elsevier, vol. 30(10), pages 2747-2765, October.

    More about this item

    Keywords

    FINANCIAL MARKET ; PRICES;

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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