Does Correlation between Stock Returns Really Increase During Turbulent Period?

46 Pages Posted: 27 Dec 2010

See all articles by françois chesnay

françois chesnay

Banque de France

Eric Jondeau

University of Lausanne - Faculty of Business and Economics (HEC Lausanne); Swiss Finance Institute; Swiss Finance Institute

Date Written: April 2000

Abstract

Correlations between international equity markets are often claimed to increase during periods of high volatility, therefore the benefits of international diversification are reduced when they are most needed, i.e. during crises. In this paper, we investigate the relationship between international correlation and stock-market turbulence. We estimate a multivariate Markov-switching model, in which the correlation matrix is allowed to vary across regimes. Subsequently, we test the null hypothesis that correlations are regime independent. Using weekly stock returns for the S&P, the DAX and the FTSE over the period 1988-1999, we find that international correlations significantly increased during turbulent periods.

Keywords: Stock returns, International correlation, Markov-switching model

JEL Classification: C53, G15

Suggested Citation

chesnay, françois and Jondeau, Eric, Does Correlation between Stock Returns Really Increase During Turbulent Period? (April 2000). Banque de France Working Paper No. 73, Available at SSRN: https://ssrn.com/abstract=1730595 or http://dx.doi.org/10.2139/ssrn.1730595

François Chesnay (Contact Author)

Banque de France ( email )

Paris
France

Eric Jondeau

University of Lausanne - Faculty of Business and Economics (HEC Lausanne) ( email )

Extranef 232
Lausanne, 1012
Switzerland
+41 21 692 33 49 (Phone)

HOME PAGE: http://people.unil.ch/ericjondeau/

Swiss Finance Institute ( email )

40, Boulevard du Pont-d'Arve
40, Bd du Pont-d'Arve
1211 Geneva 4, CH-6900
Switzerland
+41 21 692 33 49 (Phone)

Swiss Finance Institute

c/o University of Geneva
40, Bd du Pont-d'Arve
CH-1211 Geneva 4
Switzerland

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