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A New Tail-Based Correlation Measure and Its Application in Global Equity Markets

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  • Jinjing Liu

Abstract

Many studies have found that large negative returns tend to occur together. This article develops a correlation measure focusing on tails using the expected shortfall (ES), referred to as the ES-implied correlation. The new correlation measure provides closer estimates to the true correlation than does the existing value at risk-implied correlation measure in the simulations. In addition, the new correlation measure performs as well as the linear correlation measure when correlation is constant but captures changes in correlations when correlations are not constant. A series of test statistics are developed to measure and test correlation asymmetries. The empirical analysis shows that correlations among international equity markets increase significantly when returns are low.

Suggested Citation

  • Jinjing Liu, 2023. "A New Tail-Based Correlation Measure and Its Application in Global Equity Markets," Journal of Financial Econometrics, Oxford University Press, vol. 21(3), pages 959-987.
    • Handle: RePEc:oup:jfinec:v:21:y:2023:i:3:p:959-987.
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    File URL: http://hdl.handle.net/10.1093/jjfinec/nbab026
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    More about this item

    Keywords

    correlation asymmetries; expected shortfall; tail dependence; value at risk;
    All these keywords.

    JEL classification:

    • C12 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Hypothesis Testing: General
    • C15 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Statistical Simulation Methods: General
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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