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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 (2009) The impact of large changes in asset prices on intra-market correlations in the domestic and international markets. Financial Review, 44 (3). pp. 405-436. ISSN 0732-8516 (print) 1540-6288 (online)

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Official URL: http://dx.doi.org/10.1111/j.1540-6288.2009.00223.x

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 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.

Item Type:Article
Uncontrolled Keywords:conditional correlation, Roll’s R2, Value-at-Risk
Subjects:H Social Sciences > HG Finance
ID Code:16228
Deposited By:Akın Sayrak
Deposited On:22 Dec 2010 22:21
Last Modified:22 Dec 2010 22:22

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