Correlation Dynamics in European Equity Markets
Research in International Business and Finance, Vol. 20, No. 3, pp. 305-321, 2006
25 Pages Posted: 6 Aug 2003 Last revised: 5 Jan 2011
Date Written: June 1, 2003
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
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