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Should Stock Market Indexes Time Varying Correlations Be Taken Into Account? A Conditional Variance Multivariate Approach

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  • Ryan Lemand

    (ECOLE NORMALE SUPERIEURE DE CACHAN)

Abstract

The episodes of stock market crises in Europe and the U.S.A.since the year 2000,and the fragility of the international stock markets,have sparked the interest of researchers in understanding and in modeling the markets’ rising volatilities in order to prevent against crises.Portfolio managers typically rely on estimates of correlations between returns on the financial instruments in the portfolio and on the volatility of those returns.This task is relatively simple if the correlations and volatilities do not change over time.But in reality both volatility and stock market indexes’ correlations do change over time. In this paper we examine the major stock market indexes’ rising volatilities, and we show that time varying correlations should be taken into account when modeling those indexes.We find that all of the indexes that we examine exhibit relatively time varying correlations with the other indexes and we find a strong GARCH effect in all of the examined series.

Suggested Citation

  • Ryan Lemand, 2003. "Should Stock Market Indexes Time Varying Correlations Be Taken Into Account? A Conditional Variance Multivariate Approach," Econometrics 0307004, University Library of Munich, Germany, revised 07 Dec 2020.
    • Handle: RePEc:wpa:wuwpem:0307004
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    2. Kuan-Min Wang & Thanh-Binh Nguyen Thi, 2013. "Did China avoid the ‘Asian flu’? The contagion effect test with dynamic correlation coefficients," Quantitative Finance, Taylor & Francis Journals, vol. 13(3), pages 471-481, February.
    3. Kuan-Min Wang, 2013. "Did Vietnam stock market avoid the “contagion risk” from China and the U.S.? The contagion effect test with dynamic correlation coefficients," Quality & Quantity: International Journal of Methodology, Springer, vol. 47(4), pages 2143-2161, June.

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    More about this item

    Keywords

    Conditional Variance; Time Varying Correlations; Volatility; Conta- gion; VAR.;
    All these keywords.

    JEL classification:

    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • C52 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Evaluation, Validation, and Selection
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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