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Asymmetric correlations on the Croatian equity market


  • Davor Kunovac

    (Croatian National Bank, Zagreb)


This paper compares the equity market in Croatia in bad (bear or turbulent) and good (bull, calm) market conditions. The two market regimes are formally identified under the Markov Regime Switching (MRS) framework. The analysis conducted suggests that correlations between equity prices are more than twice as high during bear than in bull markets. This result holds both for the shares included in the CROBEX and for the relationship among various European equity indices. In the context of international diversifi cation the result suggests only a limited benefi t that foreign investors can count on when diversifying their portfolios by expanding to developing European markets. In addition, by evaluating a portfolio optimization model that takes asymmetric correlations into account in an out-of-sample exercise, this paper also illustrates the losses that may occur if the asymmetry is ignored in practice.

Suggested Citation

  • Davor Kunovac, 2011. "Asymmetric correlations on the Croatian equity market," Financial Theory and Practice, Institute of Public Finance, vol. 35(1), pages 1-24.
  • Handle: RePEc:ipf:finteo:v:35:y:2011:i:1:p:1-24

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    Cited by:

    1. Jakša Krišto & Alen Stojanović & Hrvoje Filipović, 2015. "Systemic risk of UCITS investment funds and financial market stability tested using MRS model," EFZG Working Papers Series 1508, Faculty of Economics and Business, University of Zagreb.
    2. Rafael Ravnik, 2014. "Short-Term Forecasting of GDP under Structural Changes," Working Papers 40, The Croatian National Bank, Croatia.
    3. Tomić, Bojan & Sesar, Andrijana, 2015. "Interdependence of Industrial Production Index and capital market in Croatia: VAR model," MPRA Paper 66816, University Library of Munich, Germany.


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