Increased Correlation Among Asset Classes: Are Volatility or Jumps to Blame, or Both?
Princeton University - Department of Economics; National Bureau of Economic Research (NBER)
University of Chicago - Booth School of Business
April 1, 2014
Chicago Booth Research Paper No. 14-11
Fama-Miller Working Paper
We develop estimators and asymptotic theory to decompose the quadratic covariation between two assets into its continuous and jump components, in a manner that is robust to the presence of market microstructure noise. Using high frequency data on different assets classes, we find that the recent financial crisis led to an increase in both the quadratic variations of the assets and their correlations. However, we find little evidence to suggest a change between the relative contributions of the Brownian and jump components, as both comove. Co-jumps stem from surprising news announcements that occur primarily before the opening of the U.S. market, and are also accompanied by an increase in Brownian-driven correlations.
Number of Pages in PDF File: 39
Keywords: Quadratic covariation, continuous and jump components, overnight jumps, news surprises, financial crisisworking papers series
Date posted: April 16, 2014
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