Global Equity Correlation in International Markets

79 Pages Posted: 11 Nov 2014 Last revised: 1 Sep 2019

See all articles by Joon Woo Bae

Joon Woo Bae

Case Western Reserve University - Weatherhead School of Management

Redouane Elkamhi

University of Toronto - Rotman School of Management

Date Written: August 28, 2019

Abstract

We present empirical evidence that the innovation in global equity correlation is a viable pricing factor in international markets. We develop a stylized model to motivate why this is a reasonable candidate factor and propose a simple way to measure it. We find that our factor has a robust negative price of risk and significantly improves the joint cross-sectional fits across various asset classes, including global equities, commodities, sovereign bonds, foreign exchange rates, and options. In exploring the pricing ability of our factor on the FX market, we also shed light on the link between international equity and currency markets through global equity correlations as an instrument for aggregate risks.

Keywords: Exchange Rates, Dynamic Conditional Correlation, Carry Trades, Momentum Trades, Predictability, Consumption Risk

JEL Classification: F31, G12, G15

Suggested Citation

Bae, Joon Woo and Elkamhi, Redouane, Global Equity Correlation in International Markets (August 28, 2019). Available at SSRN: https://ssrn.com/abstract=2521608 or http://dx.doi.org/10.2139/ssrn.2521608

Joon Woo Bae (Contact Author)

Case Western Reserve University - Weatherhead School of Management ( email )

10900 Euclid Ave.
Cleveland, OH 44106-7235
United States

Redouane Elkamhi

University of Toronto - Rotman School of Management ( email )

105 St. George Street
Toronto, Ontario M5S 3E6 M5S1S4
Canada

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