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Estimating the Correlation of International Equity Markets with Multivariate Extreme and Garch models

  • Bekiros, S.

    ()

    (Universiteit van Amsterdam)

  • Georgoutsos, D.

In this paper we study the dependence structure of extreme realization of returns between seven Southeast Asian stock markets and the U.S. Methodologically we apply the Multivariate Extreme Value theory that best suits to the problem under investigation. The main advantage of this approach is that it generates dependence measures even if the multivariate Gaussian distribution does not apply, as the case is for the tails of the high frequency stock index returns distributions. The empirical evidence suggests that Constant and Dynamic Conditional Correlation GARCH(1,1) models produce estimates of the correlation coefficient with a similar ranking to the ones produced from the Multivariate Extreme Value theory. This evidence is substantiated from a formal clustering analysis. The policy implication of our study is that the benefits from portfolio diversification with assets from the Southeast Asian stock markets are not eroded during crisis periods.

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Paper provided by Universiteit van Amsterdam, Center for Nonlinear Dynamics in Economics and Finance in its series CeNDEF Working Papers with number 06-17.

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Date of creation: 2006
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Handle: RePEc:ams:ndfwpp:06-17
Contact details of provider: Postal: Dept. of Economics and Econometrics, Universiteit van Amsterdam, Roetersstraat 11, NL - 1018 WB Amsterdam, The Netherlands
Phone: + 31 20 525 52 58
Fax: + 31 20 525 52 83
Web page: http://www.fee.uva.nl/cendef/
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  1. Andrew Ang & Geert Bekaert, 2002. "International Asset Allocation With Regime Shifts," Review of Financial Studies, Society for Financial Studies, vol. 15(4), pages 1137-1187.
  2. Kristin Forbes & Roberto Rigobon, 1999. "No Contagion, Only Interdependence: Measuring Stock Market Co-movements," NBER Working Papers 7267, National Bureau of Economic Research, Inc.
  3. de Vries, Casper G & Hartmann, Philipp & Straetmans, Stefan, 2001. "Asset Market Linkages in Crisis Periods," CEPR Discussion Papers 2916, C.E.P.R. Discussion Papers.
  4. Fran├žois Longin, 2001. "Extreme Correlation of International Equity Markets," Journal of Finance, American Finance Association, vol. 56(2), pages 649-676, 04.
  5. Ser-Huang Poon, 2004. "Extreme Value Dependence in Financial Markets: Diagnostics, Models, and Financial Implications," Review of Financial Studies, Society for Financial Studies, vol. 17(2), pages 581-610.
  6. Bracker, Kevin & Koch, Paul D., 1999. "Economic determinants of the correlation structure across international equity markets," Journal of Economics and Business, Elsevier, vol. 51(6), pages 443-471.
  7. P. Hartmann & S. Straetmans & C.G. de Vries, 2001. "Asset Market Linkages in Crisis Periods," Tinbergen Institute Discussion Papers 01-071/2, Tinbergen Institute.
  8. P. Hartmann & S. Straetmans & C.G. de Vries, 2001. "Asset Market Linkages in Crisis Periods," Tinbergen Institute Discussion Papers 01-071/2, Tinbergen Institute.
  9. Karolyi, G Andrew & Stulz, Rene M, 1996. " Why Do Markets Move Together? An Investigation of U.S.-Japan Stock Return Comovements," Journal of Finance, American Finance Association, vol. 51(3), pages 951-86, July.
  10. Starica, Catalin, 1999. "Multivariate extremes for models with constant conditional correlations," Journal of Empirical Finance, Elsevier, vol. 6(5), pages 515-553, December.
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