What drives international equity correlations? Volatility or market direction?
Abderrahim Taamouti () and
Journal of International Money and Finance, 2011, vol. 30, issue 6, 1234-1263
We consider impulse response functions to study the impact of both return and volatility on the correlation between international equity markets. Using data on the US (as the reference country), Canada, the 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.
Keywords: International; equity; markets; Asymmetric; volatility; Asymmetric; correlation; Estimation; error; Vector; autoregressive; (VAR); DCC-GARCH; Generalized; impulse; response; function; Granger; causality (search for similar items in EconPapers)
References: View references in EconPapers View complete reference list from CitEc
Citations View citations in EconPapers (12) Track citations by RSS feed
Downloads: (external link)
Full text for ScienceDirect subscribers only
Working Paper: What Drives International Equity Correlations? Volatility or Market Direction? (2009)
This item may be available elsewhere in EconPapers: Search for items with the same title.
Export reference: BibTeX
RIS (EndNote, ProCite, RefMan)
Persistent link: http://EconPapers.repec.org/RePEc:eee:jimfin:v:30:y:2011:i:6:p:1234-1263
Access Statistics for this article
Journal of International Money and Finance is currently edited by J. R. Lothian
More articles in Journal of International Money and Finance from Elsevier
Series data maintained by Dana Niculescu ().