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| Author: | Ramchand, L. Susmel, R. |
| Title: | Volatility and cross correlation across major stock markets |
| Journal: | Journal of Empirical Finance
1998 : OCT, VOL. 5:4, p. 397-416 |
| Index terms: | Stock markets Volatility Statistical methods Models |
| Freeterms: | Cross correlation Switching ARCH |
| Language: | eng |
| Abstract: | It is documented by several papers that correlations across major stock markets are higher when markets are more volatile. This is done by comparing unconditional correlations over sub-periods or by using conditional correlations that are time varying. In this paper, the relation btw. correlation and variance is examined in a conditional time and state varying framework. There is a switching ARCH (SWARCH) technique used. It is found that the correlations btw. the U.S. and other world markets are on average 2 to 3.5 times higher when the U.S. market is in high variance state as compared to low variance regime. It is also found that, compared to GARCH framework, the portfolio choices resulting from the SWARCH model of this paper lead to higher Sharpe ratios. |
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