Do Equity Market Correlations Really Change Over Time? The Case of the US and Asia-Pacific Markets

16 Pages Posted: 14 Nov 2011 Last revised: 30 Sep 2012

See all articles by George Milunovich

George Milunovich

Macquarie University - Department of Economics; Macquarie University, Macquarie Business School

Date Written: November 14, 2011

Abstract

Existing literature suggests that conditional correlations between equity markets vary over time, and increase over periods of financial crises. I test this hypothesis on a set of eight national equity indices from the Asia-Pacific region on one hand, and the US market on the other. Tse (2000) constant conditional correlation test suggests that three out of eight market pairs exhibit constant conditional correlations. The remaining five correlations are time varying, but can be further subdivided into those that are characterized by high persistence in the dynamics, and those which display strong mean reversion graphs. Global asset managers should take these features into account when allocating funds across the Asia-Pacific as the expected diversification gains are likely to differ across the region, and depend on the characteristics of the correlation coefficients.

Keywords: stock market interdependencies, Asia-Pacific region, constant conditional correlation, dynamic conditional correlation, international diversification

JEL Classification: G15, G11, C32

Suggested Citation

Milunovich, George, Do Equity Market Correlations Really Change Over Time? The Case of the US and Asia-Pacific Markets (November 14, 2011). Available at SSRN: https://ssrn.com/abstract=1959265 or http://dx.doi.org/10.2139/ssrn.1959265

George Milunovich (Contact Author)

Macquarie University - Department of Economics ( email )

Sydney NSW 2109
Australia

Macquarie University, Macquarie Business School ( email )

New South Wales 2109
Australia

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