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Increased Correlation Among Asset Classes: Are Volatility or Jumps to Blame, or Both?

39 Pages Posted: 16 Apr 2014  

Yacine Ait-Sahalia

Princeton University - Department of Economics; National Bureau of Economic Research (NBER)

Dacheng Xiu

University of Chicago - Booth School of Business

Date Written: April 1, 2014

Abstract

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.

Keywords: Quadratic covariation, continuous and jump components, overnight jumps, news surprises, financial crisis

Suggested Citation

Ait-Sahalia, Yacine and Xiu, Dacheng, Increased Correlation Among Asset Classes: Are Volatility or Jumps to Blame, or Both? (April 1, 2014). Chicago Booth Research Paper No. 14-11; Fama-Miller Working Paper . Available at SSRN: https://ssrn.com/abstract=2425676 or http://dx.doi.org/10.2139/ssrn.2425676

Yacine Ait-Sahalia

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Princeton University - Department of Economics ( email )

Fisher Hall
Princeton, NJ 08544
United States
609-258-4015 (Phone)
609-258-5398 (Fax)

Dacheng Xiu (Contact Author)

University of Chicago - Booth School of Business ( email )

5807 S. Woodlawn Avenue
Chicago, IL 60637
United States

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