The Dynamics of Asset Interdependence in the Great Recession

Alan Chernoff ()
Additional contact information
Alan Chernoff: The College of New Jersey

Atlantic Economic Journal, 2025, vol. 53, issue 3, No 4, 167-181

Abstract: Abstract Correlation among financial assets during the 2007–2008 financial crisis is a topic of interest among practitioners and academics, as the increase in correlation among previously considered uncorrelated classes during the crisis has negative implications for portfolio diversification. Previous research considered the rise in correlation throughout the crisis to be a result of liquidity. This paper aims to reexamine those results and test for evidence that a rise in correlation can be found by examining daily data from the Federal Reserve Economic Data database and Yahoo Finance. Correlation coefficients conditional on heteroskedasticity for stock and real estate returns are compared with each other, as well as with bill, note, and bond yields. By examining cross-asset correlations during the two years prior, during, and after the 2007–2008 financial crisis, the rise in cross-asset correlation during the crisis period can be attributed to a rise in volatility in financial markets at that time, and not due to a rise in the underlying linkage between asset classes. This rise in volatility can be linked to the lack of liquidity from the 2007–2008 financial crisis and supports a broader theoretical relationship between low liquidity, high volatility, and elevated measured correlations. These findings suggest that policy interventions aimed at restoring market liquidity during crises can help stabilize not only volatility but also investor confidence in diversification strategies. Perceived breakdowns in diversification may only be reflecting temporary volatility distortions, rather than structural failures in asset class separation.

Keywords: Great Recession; Liquidity risk; Contagion (search for similar items in EconPapers)
JEL-codes: G11 G41 (search for similar items in EconPapers)
Date: 2025
References: Add references at CitEc
Citations:

Downloads: (external link)
http://link.springer.com/10.1007/s11293-025-09829-z Abstract (text/html)
Access to the full text of the articles in this series is restricted.

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:kap:atlecj:v:53:y:2025:i:3:d:10.1007_s11293-025-09829-z

Ordering information: This journal article can be ordered from
http://www.springer. ... cs/journal/11293/PS2

DOI: 10.1007/s11293-025-09829-z

Access Statistics for this article

Atlantic Economic Journal is currently edited by Kathleen S. Virgo

More articles in Atlantic Economic Journal from Springer, International Atlantic Economic Society Contact information at EDIRC.
Bibliographic data for series maintained by Sonal Shukla () and Springer Nature Abstracting and Indexing ().