Extreme Correlation of International Equity Markets

24 Pages Posted: 19 Feb 1999 Last revised: 10 Mar 2017

See all articles by Francois M. Longin

Francois M. Longin

ESSEC Business School - Finance Department

Bruno Solnik

Hong Kong University of Science & Technology (HKUST) - Department of Finance ; HEC Paris - Departement Finance et Economie

Date Written: April 1, 2000

Abstract

Testing the hypothesis that international equity market correlation increases in volatile times is a difficult exercise and misleading results have often been reported in the past because of a spurious relationship between correlation and volatility. This paper focuses on extreme correlation, that is to say the correlation between returns in either the negative or positive tail of the multivariate distribution. Using “extreme value theory” to model the multivariate distribution tails, we derive the distribution of extreme correlation for a wide class of return distributions. Using monthly data on the five largest stock markets from 1958 to 1996, we reject the null hypothesis of multivariate normality for the negative tail, but not for the positive tail. We also find that correlation is not related to market volatility per se but to the market trend. Correlation increases in bear markets, but not in bull markets.

Keywords: international equity markets, volatility, correlation and extreme value theory

JEL Classification: G15, F3

Suggested Citation

Longin, Francois M. and Solnik, Bruno, Extreme Correlation of International Equity Markets (April 1, 2000). Journal of Finance, Vol. LVI, No. 2, 2001, Available at SSRN: https://ssrn.com/abstract=147848

Francois M. Longin

ESSEC Business School - Finance Department ( email )

Avenue Bernard Hirsch
BP 105 Cergy Cedex, 95021
France

HOME PAGE: www.longin.fr

Bruno Solnik (Contact Author)

Hong Kong University of Science & Technology (HKUST) - Department of Finance ( email )

Clear Water Bay, Kowloon
Hong Kong

HEC Paris - Departement Finance et Economie ( email )

1, rue de la Liberation
Jouy-en-Josas Cedex, 78351
France
+33 1 39 67 72 84 (Phone)
+33 1 39 67 70 85 (Fax)

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