High and Low Frequency Correlations in Global Equity Markets

Abstract

We model high and low frequency variation in global equity correlations using a sample of 43 countries, including developed and emerging markets during the period 1995-2008. Such variations are characterized by a multifactor asset pricing structure with second-moments dynamics leading to high frequency correlations that mean revert toward the smooth low frequency ones. We correct for non-synchronous biases from using international returns at high frequencies. We find that global correlations showed a remarkable increase during the recent financial turmoil, but the effect was uneven across countries. Those that experienced higher growth rates in both correlation components were mainly emerging markets

Keywords: Factor-Spline-GARCH, Multiple factors, International correlations, Non-synchronous trading

JEL Classification: C32, C51, C52, G12, G15