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

Posted: 18 May 2009

See all articles by Ehud I. Ronn

Ehud I. Ronn

University of Texas at Austin - Department of Finance

Akin Sayrak

University of Pittsburgh

Stathis Tompaidis

University of Texas at Austin - McCombs School of Business

Multiple version iconThere are 3 versions of this paper

Date Written: May 12, 2009

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.

Keywords: Conditional correlation, Roll's R2, Value-at-Risk

JEL Classification: C10, G12

Suggested Citation

Ronn, Ehud I. and Sayrak, Akin and Tompaidis, Stathis, The Impact of Large Changes in Asset Prices on Intra-Market Correlations in the Domestic and International Markets (May 12, 2009). The Financial Review, Vol. 44, No. 3, August 2009. Available at SSRN: https://ssrn.com/abstract=1403512

Ehud I. Ronn (Contact Author)

University of Texas at Austin - Department of Finance ( email )

Graduate School of Business
Austin, TX 78712
United States
512-471-5853 (Phone)
512-471-5073 (Fax)

Akin Sayrak

University of Pittsburgh ( email )

341 Mervis Hall
Katz School of Business
Pittsburgh, PA 15260
United States
412-512-5720 (Phone)
(412) 253-6005 (Fax)

Stathis Tompaidis

University of Texas at Austin - McCombs School of Business ( email )

Austin, TX 78712
United States

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