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Puey Ungphakorn
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Call for Papers: PIER Research Workshop 2025
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8 June 2016
20161465344000000
No. 031

International Correlation Asymmetries: Frequent-but-Small and Infrequent-but-Large Equity Returns

Abstract

We propose a novel regime-switching model to study correlation asymmetries in international equity markets. We decompose returns into frequent-but-small diffusion and infrequent-but-large jumps, and derive an estimation method for many countries. We find that correlations due to jumps, not diffusion, increase markedly in bad markets leading to correlation breaks during crises. Our model provides a better description of correlation asymmetries than GARCH, copula and stochastic volatilit ymodels. Good and bad regimes are persistent. Regime changes are detected rapidly and risk diversification allocations are improved. Asset allocation results in and out-of-sample are superior to other models including the 1/N1/N1/N strategy.

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JEL: G01G11G15
Tags: correlation breaksasset allocationinternational equity markets
The views expressed in this workshop do not necessarily reflect the views of the Puey Ungphakorn Institute for Economic Research or the Bank of Thailand.
Bruno Solnik
Bruno Solnik
Thaisiri Watewai
Thaisiri Watewai
Chulalongkorn University

Puey Ungphakorn Institute for Economic Research

273 Samsen Rd, Phra Nakhon, Bangkok 10200

Phone: 0-2283-6066

Email: pier@bot.or.th

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