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What Drives International Equity Correlations? Volatility or Market Direction?

Listed author(s):
  • 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.

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

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

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