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The Impact of Large Changes in Asset Prices on Intra‐Market Correlations in the Domestic and International Markets
Author(s) -
Ronn Ehud I.,
Sayrak Akin,
Tompaidis Stathis
Publication year - 2009
Publication title -
financial review
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.621
H-Index - 47
eISSN - 1540-6288
pISSN - 0732-8516
DOI - 10.1111/j.1540-6288.2009.00223.x
Subject(s) - economics , capital asset pricing model , portfolio , econometrics , asset (computer security) , financial economics , consumption based capital asset pricing model , explanatory power , market portfolio , philosophy , computer security , epistemology , computer science
We consider the impact of “large” changes in asset prices on intra‐market correlations in domestic and international markets. Assuming normally distributed asset returns, we show that the absolute magnitude of the correlation, conditional on a change is greater than or equal to a given absolute size of one of the variables, is monotonically increasing in the magnitude of that absolute change. Empirical tests using domestic and international‐market data support this theoretical result. These results have significant implications for portfolio management, hedging interest rate risk, tests of asset pricing models, Roll's concern with asset pricing models' explanatory power, and implementation of Value‐at‐Risk.