Correlation Dynamics in European Equity Markets

Research in International Business and Finance, Vol. 20, No. 3, pp. 305-321, 2006

EFA 2003 Annual Conference Paper No. 744

25 Pages Posted: 6 Aug 2003 Last revised: 5 Jan 2011

See all articles by Colm Kearney

Colm Kearney

Monash University - Monash Business School

Valerio Potì

University College Dublin

Date Written: June 1, 2003

Abstract

We examine correlation dynamics using daily data from 1993 to 2002 on the 5 largest euro-zone stock market indices. We also study, for comparison, the correlations of a sample of individual stocks. We employ both unconditional and conditional estimation methodologies, including estimation of the conditional correlations using the symmetric and asymmetric DCC-MVGARCH model, extended with the inclusion of a deterministic time trend. We confirm the presence of a structural break in market index correlations reported by previous researchers and, using an innovative likelihood-based search, we find that it occurred at the beginning the process of monetary integration in the Euro-zone. We find mixed evidence of asymmetric correlation reactions to news of the type modelled by conventional asymmetric DCC-MVGARCH specifications.

Keywords: Correlation dynamics, GARCH, idiosyncratic risk

Suggested Citation

Kearney, Colm and Potì, Valerio, Correlation Dynamics in European Equity Markets (June 1, 2003). Research in International Business and Finance, Vol. 20, No. 3, pp. 305-321, 2006, EFA 2003 Annual Conference Paper No. 744, Available at SSRN: https://ssrn.com/abstract=424521 or http://dx.doi.org/10.2139/ssrn.424521

Colm Kearney

Monash University - Monash Business School ( email )

Sir John Monash Drive
Caulfield
Melbourne, Victoria 3168
Australia
+353399031021 (Phone)

Valerio Potì (Contact Author)

University College Dublin ( email )

M. Smurfit School of Business
Carysfort Avenue, Blackrock
Dublin, Co Dublin
Ireland

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