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Correlation Dynamics in European Equity Markets

Author

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  • Colm Kearney

    (Trinity College, Dublin - School of Business Studies & Institute for International Integration Studies)

  • Valerio Poti

    (Dublin City University - Business School)

Abstract

We examine correlation dynamics using daily data from 1993 to 2002 on the 5 largest eurozone stock market indices. We also study, for comparison, the correlations of a sample of individual stocks. We employ both unconditional and conditional estimation methodologies,including estimation of the conditional correlations using the symmetric and asymmetric DCC-MVGARCH model, extended with the inclusion of a deterministic time trend. We confirm the presence of a structural break in market index correlations reported by previous researchers and, using an innovative likelihood-based search, we find that it occurred at the beginning the process of monetary integration in the Euro-zone. We find mixed evidence of asymmetric correlation reactions to news of the type modelled by conventional asymmetric DCC-MVGARCH specifications.

Suggested Citation

  • Colm Kearney & Valerio Poti, 2005. "Correlation Dynamics in European Equity Markets," Finance 0507008, University Library of Munich, Germany.
    • Handle: RePEc:wpa:wuwpfi:0507008
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    More about this item

    Keywords

    Correlation Dynamics; GARCH;

    JEL classification:

    • 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
    • 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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