High and Low Frequency Correlations in Global Equity Markets
This study models high and low frequency variation in global equity correlations using a comprehensive sample of 43 countries that includes developed and emerging markets, during the period 1995-2008. These two types of variations are modeled following the semi-parametric Factor-Spline-GARCH approach of Rangel and Engle (2008). This framework is extended and modified to incorporate the effect of multiple factors and to address the issue of non-synchronicity in international markets. Our empirical analysis suggests that the slow-moving dynamics of global correlations can be described by the Factor-Spline-GARCH specifications using either weekly or daily data. The analysis shows that the low frequency component of global correlations increased in the current financial turmoil; however, this increase was not equally distributed across countries. The countries that experienced the largest increase in correlations were mainly emerging markets.
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- 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.
- Robert F. Engle & Jose Gonzalo Rangel, 2008. "The Spline-GARCH Model for Low-Frequency Volatility and Its Global Macroeconomic Causes," Review of Financial Studies, Society for Financial Studies, vol. 21(3), pages 1187-1222, May.
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- Dumas, Bernard & Harvey, Campbell R. & Ruiz, Pierre, 2003.
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- Dumas, Bernard & Harvey, Campbell R. & Ruiz, Pierre, 2000. "Are Correlations of Stock Returns Justified by Subsequent Changes in National Outputs?," Working Papers 00-2, University of Pennsylvania, Wharton School, Weiss Center.
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