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Does Correlation Between Stock Returns Really Increase During Turbulent Periods?

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  • Francois Chesnay
  • Eric Jondeau

Abstract

type="main" xml:lang="en"> Correlations betwen international equity markets are often claimed to increase during periods of high volatility. Therefore the benefits of international diversification are reduced when they are most needed, i.e. during turbulent periods. This paper investigates the relationship between international correlation and stock-market turbulence. We estimate a multivariate Markov-switching model, in which the correlation matrix varies across regimes. Subsequently, we test the null hypothesis that correlations are regime-independent. Using weekly stock returns for the S&P, the DAX and the FTSE over the period 1988–99, we find that international correlations significantly increased during turbulent periods. (J.E.L.: C53, G15).

Suggested Citation

  • Francois Chesnay & Eric Jondeau, 2001. "Does Correlation Between Stock Returns Really Increase During Turbulent Periods?," Economic Notes, Banca Monte dei Paschi di Siena SpA, vol. 30(1), pages 53-80, February.
    • Handle: RePEc:bla:ecnote:v:30:y:2001:i:1:p:53-80
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    File URL: http://hdl.handle.net/10.1111/1468-0300.00047
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    JEL classification:

    • C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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