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The Impact of Large Changes in Asset Prices on Intra-Market Correlations in the Domestic and International Markets

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  • Ehud I. Ronn
  • Akin Sayrak
  • Stathis Tompaidis

Abstract

We consider the impact of "large" changes in asset prices on intra-market correlations in domestic and international markets. Assuming normally distributed asset returns, we show that the absolute magnitude of the correlation, conditional on a change is greater than or equal to a given absolute size of one of the variables, is monotonically increasing in the magnitude of that absolute change. Empirical tests using domestic and international-market data support this theoretical result. These results have significant implications for portfolio management, hedging interest rate risk, tests of asset pricing models, Roll's concern with asset pricing models' explanatory power, and implementation of Value-at-Risk. Copyright (c) 2009, The Eastern Finance Association.

Suggested Citation

  • Ehud I. Ronn & Akin Sayrak & Stathis Tompaidis, 2009. "The Impact of Large Changes in Asset Prices on Intra-Market Correlations in the Domestic and International Markets," The Financial Review, Eastern Finance Association, vol. 44(3), pages 405-436, August.
  • Handle: RePEc:bla:finrev:v:44:y:2009:i:3:p:405-436
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    Cited by:

    1. Urbina, Jilber, 2013. "Contagion or Interdependence in the recent Global Financial Crisis? An application to the stock markets using unconditional cross-market correlations," Working Papers 2072/211884, Universitat Rovira i Virgili, Department of Economics.
    2. Pejman Abedifar & Paolo Giudici & Shatha Hashem, 2017. "Heterogeneous Market Structure and Systemic Risk: Evidence from Dual Banking Systems," DEM Working Papers Series 134, University of Pavia, Department of Economics and Management.
    3. Diebold, Francis X. & Yilmaz, Kamil, 2015. "Financial and Macroeconomic Connectedness: A Network Approach to Measurement and Monitoring," OUP Catalogue, Oxford University Press, number 9780199338306.
    4. You, Leyuan & Daigler, Robert T., 2010. "Is international diversification really beneficial?," Journal of Banking & Finance, Elsevier, vol. 34(1), pages 163-173, January.
    5. repec:eee:finsta:v:33:y:2017:i:c:p:96-119 is not listed on IDEAS

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