Extreme correlation of International Equity Markets

Bruno Solnik and François Longin ()
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Bruno Solnik: GREGH - Groupement de Recherche et d'Etudes en Gestion à HEC - HEC Paris - Ecole des Hautes Etudes Commerciales - CNRS - Centre National de la Recherche Scientifique
François Longin: ESSEC Business School

Working Papers from HAL

Abstract: Testing the hypothesis that international equity market correlation increases in volatile times is a difficult exercise and misleading results have often been reported in the past because of a spurious relationship between correlation and volatility. This paper focuses on extreme correlation, that is to say the correlation between returns in either the negative or positive tail of the multivariate distribution. Using "extreme value theory" to model the multivariate distribution tails, we derive the distribution of extreme correlation for a wide class of return distributions. Using monthly data on the five largest stock markets from 1958 to 1996, we reject the null hypothesis of multivariate normality for the negative tail, but not for the positive tail. We also find that correlation is not related to market volatility per se but to the market trend. Correlation increases in bear markets, but not in bull markets.

Keywords: international equity markets; volatility; correlation and extreme value theory (search for similar items in EconPapers)
Date: 2000
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Citations: View citations in EconPapers (13)

Published in 2000

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Persistent link: https://EconPapers.repec.org/RePEc:hal:wpaper:hal-00598166

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