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Extreme Correlation of International Equity Markets
Author(s) -
Longin François,
Solnik Bruno
Publication year - 2001
Publication title -
the journal of finance
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 18.151
H-Index - 299
eISSN - 1540-6261
pISSN - 0022-1082
DOI - 10.1111/0022-1082.00340
Subject(s) - econometrics , spurious relationship , extreme value theory , equity (law) , economics , correlation , volatility (finance) , normality , null hypothesis , multivariate statistics , multivariate normal distribution , financial economics , tail dependence , mathematics , statistics , geometry , political science , law
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. Using “extreme value theory” to model the multivariate distribution tails, we derive the distribution of extreme correlation for a wide class of return distributions. Empirically, 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.