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

40 Pages Posted: 20 Dec 2000

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: September 18, 2000

Abstract

This paper considers the impact and implications of "large" changes in asset prices on the intra-market correlations in the domestic and international markets. Assuming that asset returns are normally-distributed, we show that the absolute magnitude of the correlation, conditional on a change greater than or equal to a given absolute size in one of the variables, is monotonically increasing in the magnitude of that absolute change. We present empirical tests using domestic and international-market data that support this theoretical result. These results have significant implications for hedging interest rate risk, tests of asset pricing models, Roll's R 2 concern with the explanatory power of financial asset pricing models, and the implementation of the value-at-risk concept.

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 (September 18, 2000). EFMA 2000 Athens. Available at SSRN: https://ssrn.com/abstract=251409 or http://dx.doi.org/10.2139/ssrn.251409

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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