Estimating the Correlation of International Equity Markets with Multivariate Extreme and Garch models

Stelios Bekiros and Dimitris Georgoutsos

No 06-17, CeNDEF Working Papers from Universiteit van Amsterdam, Center for Nonlinear Dynamics in Economics and Finance

Abstract: In this paper we study the dependence structure of extreme realization of returns between seven Southeast Asian stock markets and the U.S. Methodologically we apply the Multivariate Extreme Value theory that best suits to the problem under investigation. The main advantage of this approach is that it generates dependence measures even if the multivariate Gaussian distribution does not apply, as the case is for the tails of the high frequency stock index returns distributions. The empirical evidence suggests that Constant and Dynamic Conditional Correlation GARCH(1,1) models produce estimates of the correlation coefficient with a similar ranking to the ones produced from the Multivariate Extreme Value theory. This evidence is substantiated from a formal clustering analysis. The policy implication of our study is that the benefits from portfolio diversification with assets from the Southeast Asian stock markets are not eroded during crisis periods.

Date: 2006
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