Asymmetric Correlations of Equity Portfolios

Correlations between US stocks and the aggregate US market are much greater for downside moves, especially for extreme downside moves, than for upside moves. We develop a new statistic for measuring, comparing and testing asymmetries in conditional correlations. Conditional on the downside, correlations in the data differ from the conditional correlations implied by a normal distribution by 11.6%. We find that conditional asymmetric correlations are fundamentally different from other measures of asymmetry like skewness and co-skewness. We find that small stocks, value stocks and past loser stocks have more asymmetric movements. Controlling for size, we find that stocks with lower betas exhibit greater correlation asymmetries and we find no relationship between leverage and correlation asymmetries. Correlation asymmetries in the data reject the null of multivariate normal distributions at daily, weekly and monthly frequencies. However, several empirical models with greater flexibility, particularly regime-switching models, perform much better at capturing correlation asymmetries.

[1]  R. Rigobón,et al.  No Contagion, Only Interdependence: Measuring Stock Market Comovements , 2002 .

[2]  Campbell R. Harvey,et al.  Are Correlations of Stock Returns Justified by Subsequent Changes in National Outputs? , 2002 .

[3]  Wei Xiong,et al.  Contagion as a Wealth Effect , 2001 .

[4]  G. Duffee.  Asymmetric cross-sectional dispersion in stock returns: evidence and implications , 2001 .

[5]  D. C. Joaquin,et al.  Are the Gains from International Portfolio Diversification Exaggerated? The Influence of Downside Risk in Bear Markets , 2001 .

[6]  René M. Stulz,et al.  A New Approach to Measuring Financial Contagion , 2000 .

[7]  F. Longin,et al.  Extreme Correlation of International Equity Markets , 2000 .

[8]  M. Lettau,et al.  Have Individual Stocks Become More Volatile? An Empirical Exploration of Idiosyncratic Risk , 2000 .

[9]  C. Stărică,et al.  Multivariate extremes for models with constant conditional correlations , 1999 .

[10]  Wei Xiong,et al.  Contagion as a Wealth Effect of Financial Intermediaries , 1999 .

[11]  J. Stein,et al.  Differences of Opinion, Rational Arbitrage and Market Crashes , 1999 .

[12]  R. Engle,et al.  Time-Varying Betas and Asymmetric Effect of News: Empirical Analysis of Blue Chip Stocks , 1999 .

[13]  R. Rigobón,et al.  No Contagion, Only Interdependence: Measuring Stock Market Co-Movements , 1999 .

[14]  Campbell R. Harvey,et al.  Current Version : April 6 , 1999 Autoregressive Conditional Skewness , 1999 .

[15]  Campbell R. Harvey,et al.  Conditional Skewness in Asset Pricing Tests , 1999 .

[16]  K. Kroner,et al.  Modeling Asymmetric Comovements of Asset Returns , 1998 .

[17]  Campbell R. Harvey,et al.  Distributional Characteristics of Emerging Market Returns and Asset Allocation , 1998 .

[18]  Michael S. Gibson,et al.  Pitfalls in Tests for Changes in Correlations , 1997 .

[19]  Campbell R. Harvey,et al.  Foreign Speculators and Emerging Equity Markets , 1997 .

[20]  Guojun Wu,et al.  Asymmetric Volatility and Risk in Equity Markets , 1997 .

[21]  Campbell R. Harvey,et al.  Are Common Swings in International Stock Returns Justified by Subsequent Changes in National Outputs , 1997 .

[22]  Stephen Gray.  Modeling the Conditional Distribution of Interest Rates as a Regime-Switching Process , 1996 .

[23]  René M. Stulz,et al.  Why Do Markets Move Together? An Investigation of U.S.-Japan Stock Return Comovements , 1996 .

[24]  E. Fama,et al.  Multifactor Explanations of Asset Pricing Anomalies , 1996 .

[25]  Daniel B. Nelson,et al.  Good News, Bad News, Volatility, and Betas , 1995 .

[26]  Campbell R. Harvey,et al.  Emerging Equity Market Volatility , 1995 .

[27]  Ludger Hentschel.  All in the family Nesting symmetric and asymmetric GARCH models , 1995 .

[28]  G. Duffee,et al.  Stock returns and volatility A firm-level analysis , 1995 .

[29]  R. Engle,et al.  Multivariate Simultaneous Generalized ARCH , 1995, Econometric Theory.

[30]  Campbell R. Harvey,et al.  Forecasting International Equity Correlations , 1994 .

[31]  R. Engle,et al.  Do Bulls and Bears Move Across Borders? International Transmission of Stock Returns and Volatility , 1994 .

[32]  Ravi Jagannathan,et al.  Assessing Specification Errors in Stochastic Discount Factor Models , 1994 .

[33]  F. Longin,et al.  Is the Correlation in International Equity Returns Constant: 1960-90? , 1995 .

[34]  L. Glosten,et al.  On the Relation between the Expected Value and the Volatility of the Nominal Excess Return on Stocks , 1993 .

[35]  Narasimhan Jegadeesh,et al.  Returns to Buying Winners and Selling Losers: Implications for Stock Market Efficiency , 1993 .

[36]  E. Fama,et al.  Common risk factors in the returns on stocks and bonds , 1993 .

[37]  Ying-Wong Cheung,et al.  Stock Price Dynamics and Firm Size: An Empirical investigation , 1992 .

[38]  Gautam Kaul,et al.  Asymmetric Predictability of Conditional Variances , 1991 .

[39]  George Tauchen,et al.  Quadrature-Based Methods for Obtaining Approximate Solutions to Nonlinear Asset Pricing Models , 1991 .

[40]  Campbell R. Harvey,et al.  The Variation of Economic Risk Premiums , 1990, Journal of Political Economy.

[41]  John Y. Campbell,et al.  No News is Good News: An Asymmetric Model of Changing Volatility in Stock Returns , 1991 .

[42]  S. P. Kothari,et al.  Nonstationary expected returns: Implications for tests of market efficiency and serial correlation in returns , 1989 .

[43]  James D. Hamilton.  A New Approach to the Economic Analysis of Nonstationary Time Series and the Business Cycle , 1989 .

[44]  G. Schwert.  Why Does Stock Market Volatility Change Over Time? , 1988 .

[45]  K. French,et al.  Expected stock returns and volatility , 1987 .

[46]  W. Newey,et al.  A Simple, Positive Semi-Definite, Heteroskedasticity and Autocorrelationconsistent Covariance Matrix , 1986 .

[47]  R. Banz,et al.  The relationship between return and market value of common stocks , 1981 .

[48]  H. White.  A Heteroskedasticity-Consistent Covariance Matrix Estimator and a Direct Test for Heteroskedasticity , 1980 .

[49]  Myron S. Scholes,et al.  Estimating betas from nonsynchronous data , 1977 .

[50]  Vijay S. Bawa,et al.  Abstract: Capital Market Equilibrium in a Mean-Lower Partial Moment Framework , 1977, Journal of Financial and Quantitative Analysis.

[51]  S. Rosenbaum.  Moments of a Truncated Bivariate Normal Distribution , 1961 .

[52]  Jun Pan.  Integrated Time-Series Analysis of Spot and Option Prices , 2022 .