extreme correlation of international equity markets（极端的国际股票市场的相关性）.pdf

EXTREME CORRELATION OF INTERNATIONAL EQUITY MARKETS1 François Longin2 and Bruno Solnik3 Forthcoming in The Journal of Finance Abstract Testing the hypothesis that international equity market correlation increases in volatile times is a difficult exercise and misleading results have often been reported in the past because of a spurious relationship between correlation and volatility. This paper focuses on extreme correlation, that is to say the correlation between returns in either the negative or positive tail of the multivariate distribution. Using “extreme value theory” to model the multivariate distribution tails, we derive the distribution of extreme correlation for a wide class of return distributions. Using monthly data on the five largest stock markets from 1958 to 1996, we reject the null hypothesis of multivariate normality for the negative tail, but not for the positive tail. We also find that correlation is not related to market volatility per se but to the market trend. Correlation increases in bear markets, but not in bull markets. First version: May 1996. This version: April 2000 Keywords: international equity markets, volatility, correlation and extreme value theory. JEL classification numbers: G15, F3. 1 We would like to thank David Bates, Michael Brandt, Bernard Dumas, Paul Embrechts, Claudia Klüppelberg, Jérôme Legras, Jacques Olivier, Stefan Straetmans and the participants at the Bachelier seminar (Paris, October 1997), London School of Economics, INSEAD, Université de Genève, Université de Lausanne, the American Finance Association meetings (New York, January 1999), the French Finance Association meetings (Aix-e