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An equicorrelation measure for equity, bond, foreign exchange and commodity returns

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  • Sofiane Aboura
  • Julien Chevallier

Abstract

This article provides the first empirical application of the dynamic equicorrelation (DECO) model to a cross-market data set composed of equities, bonds, foreign exchange and commodity returns during 1983--2013. The results reveal that the average cross-market equicorrelation is around 47%, although it is found to be time-varying and mean-reverting. Besides, we display the equicorrelation across markets as a natural way of looking at the DECO dynamics, which overcomes the cumbersome estimation difficulties encountered with multivariate GARCH models. Implications are derived in terms of asset management.

Suggested Citation

  • Sofiane Aboura & Julien Chevallier, 2013. "An equicorrelation measure for equity, bond, foreign exchange and commodity returns," Applied Economics Letters, Taylor & Francis Journals, vol. 20(18), pages 1618-1624, December.
  • Handle: RePEc:taf:apeclt:v:20:y:2013:i:18:p:1618-1624
    DOI: 10.1080/13504851.2013.829192
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    1. repec:taf:jnlbes:v:30:y:2012:i:2:p:212-228 is not listed on IDEAS
    2. Ang, Andrew & Chen, Joseph, 2002. "Asymmetric correlations of equity portfolios," Journal of Financial Economics, Elsevier, vol. 63(3), pages 443-494, March.
    3. Longin, Francois & Solnik, Bruno, 1995. "Is the correlation in international equity returns constant: 1960-1990?," Journal of International Money and Finance, Elsevier, vol. 14(1), pages 3-26, February.
    4. Rachael Carroll & Colm Kearney, 2012. "Do trading volumes explain the persistence of GARCH effects?," Applied Financial Economics, Taylor & Francis Journals, vol. 22(23), pages 1993-2008, December.
    5. Robert Engle & Neil Shephard & Kevin Shepphard, 2008. "Fitting vast dimensional time-varying covariance models," OFRC Working Papers Series 2008fe30, Oxford Financial Research Centre.
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