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Stochastic Correlation Across International Stock Markets

  • Ball, Clifford A.
  • Torous, Walter N.
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    This paper examines the correlation across a number of international stock market indices. As correlation is not observable, we assume it to be a latent variable whose dynamics must be estimated using data on observables. To do so, we use ¯ltering methods to extract stochastic correlation from returns data. We ¯nd evidence that the estimated correlation structure is dynamically changing over time. We also investigate the link between stochastic correlation and volatility. In general, stochastic correlation tends to increase in response to higher volatility but the e®ect is by no means consistent. These results have important implications for portfolio theory as well as risk management.

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    File URL: http://www.escholarship.org/uc/item/6vn9q79w.pdf;origin=repeccitec
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    Paper provided by Anderson Graduate School of Management, UCLA in its series University of California at Los Angeles, Anderson Graduate School of Management with number qt6vn9q79w.

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    Date of creation: 07 Jun 2000
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    Handle: RePEc:cdl:anderf:qt6vn9q79w
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    Web page: http://www.escholarship.org/repec/anderson_fin/

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    1. Andrew Ang & Geert Bekaert, 1998. "Regime Switches in Interest Rates," NBER Working Papers 6508, National Bureau of Economic Research, Inc.
    2. Bollerslev, Tim, 1986. "Generalized autoregressive conditional heteroskedasticity," Journal of Econometrics, Elsevier, vol. 31(3), pages 307-327, April.
    3. Clifford A. Ball & Walter N. Torous, 1999. "The Stochastic Volatility of Short-Term Interest Rates: Some International Evidence," Journal of Finance, American Finance Association, vol. 54(6), pages 2339-2359, December.
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