IDEAS home Printed from https://ideas.repec.org/
MyIDEAS: Log in (now much improved!) to save this paper

What Drives International Equity Correlations? Volatility or Market Direction?

  • Tsafack, Georges
  • Taamouti, Abderrahim
  • Amira, Khaled

We consider impulse response functions to study the impact of both return and volatility on correlation between international equity markets. Using data on US (as the reference country), Canada, UK and France equity indices, empirical evidence shows that without taking into account the effect of return, there is an (asymmetric) effect of volatility on correlation. The volatility seems to have an impact on correlation especially during downturn periods. However, once we introduce the effect of return, the impact of volatility on correlation disappears. These observations suggest that, the relation between volatility and correlation is an association rather than a causality. The strong increase in the correlation is driven by the past of the return and the market direction rather than the volatility.

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

File URL: http://e-archivo.uc3m.es/bitstream/handle/10016/5211/09-41-22.pdf?sequence=1
Download Restriction: no

Paper provided by Universidad Carlos III de Madrid. Departamento de Economía in its series UC3M Working papers. Economics with number we094122.

as
in new window

Length:
Date of creation: Jun 2009
Date of revision:
Handle: RePEc:cte:werepe:we094122
Contact details of provider: Web page: http://www.eco.uc3m.es/

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

as in new window
  1. Tim Bollerslev, 1986. "Generalized autoregressive conditional heteroskedasticity," EERI Research Paper Series EERI RP 1986/01, Economics and Econometrics Research Institute (EERI), Brussels.
  2. Alessandro Beber & Michael W. Brandt, 2010. "When It Cannot Get Better or Worse: The Asymmetric Impact of Good and Bad News on Bond Returns in Expansions and Recessions," Review of Finance, European Finance Association, vol. 14(1), pages 119-155.
  3. Bodart, V. & Reding, P., 1998. "Exchange Rate Regime, Volatility and International Correlations on Bond and Stock Markets," Papers 204, Notre-Dame de la Paix, Sciences Economiques et Sociales.
  4. John Y. Campbell & Ludger Hentschel, 1991. "No News is Good News: An Asymmetric Model of Changing Volatility in Stock Returns," NBER Working Papers 3742, National Bureau of Economic Research, Inc.
  5. Pesaran, M. H. & Shin, Y., 1997. "Generalised Impulse Response Analysis in Linear Multivariate Models," Cambridge Working Papers in Economics 9710, Faculty of Economics, University of Cambridge.
  6. Brenner, Menachem & Pasquariello, Paolo & Subrahmanyam, Marti, 2009. "On the Volatility and Comovement of U.S. Financial Markets around Macroeconomic News Announcements," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 44(06), pages 1265-1289, December.
  7. Torben G. Andersen & Tim Bollerslev & Francis X. Diebold & Paul Labys, 2003. "Modeling and Forecasting Realized Volatility," Econometrica, Econometric Society, vol. 71(2), pages 579-625, March.
  8. Torben G. Andersen & Tim Bollerslev & Francis X. Diebold & Clara Vega, 2002. "Micro Effects of Macro Announcements: Real-Time Price Discovery in Foreign Exchange?," Center for Financial Institutions Working Papers 02-23, Wharton School Center for Financial Institutions, University of Pennsylvania.
  9. Lorenzo Cappiello & Robert F. Engle & Kevin Sheppard, 2006. "Asymmetric Dynamics in the Correlations of Global Equity and Bond Returns," Journal of Financial Econometrics, Society for Financial Econometrics, vol. 4(4), pages 537-572.
  10. Pindyck, Robert S., 1983. "Risk, inflation, and the stock market," Working papers 1423-83., Massachusetts Institute of Technology (MIT), Sloan School of Management.
  11. Andersen, Torben G. & Bollerslev, Tim & Diebold, Francis X. & Vega, Clara, 2007. "Real-time price discovery in global stock, bond and foreign exchange markets," Journal of International Economics, Elsevier, vol. 73(2), pages 251-277, November.
  12. G. William Schwert, 1988. "Why Does Stock Market Volatility Change Over Time?," NBER Working Papers 2798, National Bureau of Economic Research, Inc.
  13. Mun, Kyung-Chun, 2007. "Volatility and correlation in international stock markets and the role of exchange rate fluctuations," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 17(1), pages 25-41, February.
  14. Newey, Whitney K & West, Kenneth D, 1987. "A Simple, Positive Semi-definite, Heteroskedasticity and Autocorrelation Consistent Covariance Matrix," Econometrica, Econometric Society, vol. 55(3), pages 703-08, May.
  15. Kristin J. Forbes & Roberto Rigobon, 2002. "No Contagion, Only Interdependence: Measuring Stock Market Comovements," Journal of Finance, American Finance Association, vol. 57(5), pages 2223-2261, October.
  16. Nelson, Daniel B, 1991. "Conditional Heteroskedasticity in Asset Returns: A New Approach," Econometrica, Econometric Society, vol. 59(2), pages 347-70, March.
  17. Turner, C.M. & Startz, R. & Nelson, C.R., 1989. "The Markov Model Of Heteroskedasticity, Risk And Learning In The Stock Market," Discussion Papers in Economics at the University of Washington 89-01, Department of Economics at the University of Washington.
  18. Lawrence R. Glosten & Ravi Jagannathan & David E. Runkle, 1993. "On the relation between the expected value and the volatility of the nominal excess return on stocks," Staff Report 157, Federal Reserve Bank of Minneapolis.
  19. Ramchand, Latha & Susmel, Raul, 1998. "Volatility and cross correlation across major stock markets," Journal of Empirical Finance, Elsevier, vol. 5(4), pages 397-416, October.
  20. Ang, Andrew & Chen, Joseph, 2002. "Asymmetric correlations of equity portfolios," Journal of Financial Economics, Elsevier, vol. 63(3), pages 443-494, March.
  21. Bekaert, Geert & Wu, Guojun, 2000. "Asymmetric Volatility and Risk in Equity Markets," Review of Financial Studies, Society for Financial Studies, vol. 13(1), pages 1-42.
  22. Jean-Marie Dufour & Denis Pelletier & Éric Renault, 2003. "Short Run and Long Run Causality in Time Series: Inference," CIRANO Working Papers 2003s-61, CIRANO.
  23. François Longin, 2001. "Extreme Correlation of International Equity Markets," Journal of Finance, American Finance Association, vol. 56(2), pages 649-676, 04.
  24. Engle, Robert, 2002. "Dynamic Conditional Correlation: A Simple Class of Multivariate Generalized Autoregressive Conditional Heteroskedasticity Models," Journal of Business & Economic Statistics, American Statistical Association, vol. 20(3), pages 339-50, July.
  25. 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.
  26. Engle, Robert F & Ng, Victor K, 1993. " Measuring and Testing the Impact of News on Volatility," Journal of Finance, American Finance Association, vol. 48(5), pages 1749-78, December.
  27. French, Kenneth R. & Schwert, G. William & Stambaugh, Robert F., 1987. "Expected stock returns and volatility," Journal of Financial Economics, Elsevier, vol. 19(1), pages 3-29, September.
  28. Tim Bollerslev & Julia Litvinova & George Tauchen, 2006. "Leverage and Volatility Feedback Effects in High-Frequency Data," Journal of Financial Econometrics, Society for Financial Econometrics, vol. 4(3), pages 353-384.
  29. Christopher M. Turner & Richard Startz & Charles R. Nelson, 1989. "A Markov Model of Heteroskedasticity, Risk, and Learning in the Stock Market," NBER Working Papers 2818, National Bureau of Economic Research, Inc.
  30. Taamouti, Abderrahim & García, René & Dufour, Jean-Marie, 2008. "Measuring causality between volatility and returns with high-frequency data," UC3M Working papers. Economics we084422, Universidad Carlos III de Madrid. Departamento de Economía.
Full references (including those not matched with items on IDEAS)

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

When requesting a correction, please mention this item's handle: RePEc:cte:werepe:we094122. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Ana Poveda)

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.

This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.