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The Impact of Large Changes in Asset Prices on Intra-Market Correlations in the Domestic and International Markets

Ronn, Ehud I. and Sayrak, Akın and Tompaidis, Stathis (2008) The Impact of Large Changes in Asset Prices on Intra-Market Correlations in the Domestic and International Markets. (Accepted/In Press)

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Official URL: http://www.thefinancialreview.org/Default.htm

Abstract

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 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.

Item Type:Article
Subjects:H Social Sciences > HG Finance > HG4501-6051 Investment, capital formation, speculation
H Social Sciences > HB Economic Theory > HB135-147 Mathematical economics. Quantitative methods
H Social Sciences > HA Statistics
ID Code:10401
Deposited By:Akın Sayrak
Deposited On:10 Nov 2008 08:42
Last Modified:22 Dec 2010 22:23

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