Correlation structure of extreme stock returns

Pierre Cizeau, Marc Potters and Jean-Philippe Bouchaud
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Pierre Cizeau: Science & Finance, Capital Fund Management
Marc Potters: Science & Finance, Capital Fund Management
Jean-Philippe Bouchaud: Science & Finance, Capital Fund Management

No 6034, Science & Finance (CFM) working paper archive from Science & Finance, Capital Fund Management

Abstract: It is commonly believed that the correlations between stock returns increase in high volatility periods. We investigate how much of these correlations can be explained within a simple non-Gaussian one-factor description with time independent correlations. Using surrogate data with the true market return as the dominant factor, we show that most of these correlations, measured by a variety of different indicators, can be accounted for. In particular, this one-factor model can explain the level and asymmetry of empirical exceedance correlations. However, more subtle effects require an extension of the one factor model, where the variance and skewness of the residuals also depend on the market return.

JEL-codes: G1 G14 G21 (search for similar items in EconPapers)
Date: 2000-06
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Published in Quantitative Finance 1 217-222 (2001)

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Persistent link: http://EconPapers.repec.org/RePEc:sfi:sfiwpa:0006034

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