European Business Schools Librarian's Group

HEC Research Papers Series,
HEC Paris

No 705: Extreme correlation of international equity markets

François LONGIN and Bruno SOLNIK

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

JEL-codes: F30; G15

23 pages, April 1, 2000

Full text files

7e029195c03db20ea752b55b17924cff.pdf PDF-file 

Download statistics

Questions (including download problems) about the papers in this series should be directed to Antoine Haldemann ()
Report other problems with accessing this service to Sune Karlsson ().

This page generated on 2024-02-05 15:47:24.