Citation

Discussion Paper Details

Please find the details for DP3172 in an easy to copy and paste format below:

Full Details   |   Bibliographic Reference

Full Details

Title: Increased Correlation in Bear markets: A Downside Risk Perspective

Author(s): Rachel Campbell, Kees Koedijk and Paul Kofman

Publication Date: January 2002

Keyword(s): correlation, downside risk, extreme returns and international equity markets

Programme Area(s): Financial Economics

Abstract: A number of studies have provided evidence of increased correlation in global financial market returns during bear markets. Others, however, have shown that some of this evidence may have been biased. We derive an alternative estimator for implied correlation based on portfolio downside risk measures that does not suffer from this bias. These unbiased quantile correlation estimates are directly applicable to portfolio optimization and to risk management techniques in general. This simple and practical approach captures the increasing correlation in extreme market conditions while providing a pragmatic approach to understanding correlation structure in multivariate return distributions. Based on data for international equity markets we find evidence of significant increased correlation in extreme returns in international equity markets. This proves the importance of providing a tail adjusted mean-variance covariance matrix.

For full details and related downloads, please visit: https://cepr.org/active/publications/discussion_papers/dp.php?dpno=3172

Bibliographic Reference

Campbell, R, Koedijk, K and Kofman, P. 2002. 'Increased Correlation in Bear markets: A Downside Risk Perspective'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=3172