A New Tail-Based Correlation Measure and Its Application in Global Equity Markets

A New Tail-Based Correlation Measure and Its Application in Global Equity Markets

The co-dependence between assets tends to increase when the market declines. This paper develops a correlation measure focusing on market declines using the expected shortfall (ES), referred to as the ES-implied correlation, to improve the existing...

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Main Author: Liu, Jinjing
Format: Working Paper
Language:English
Published: World Bank, Washington, DC 2019
Subjects:
CORRELATION ASYMMETRIES
TAIL DEPENDENCE
HEAVY-TAILED DISTRIBUTIONS
VALUE AT RISK
EQUITY MARKET
Online Access:http://documents.worldbank.org/curated/en/641081547753593928/A-New-Tail-Based-Correlation-Measure-and-Its-Application-in-Global-Equity-Markets
http://hdl.handle.net/10986/31177
id okr-10986-31177
recordtype oai_dc
spelling okr-10986-311772021-12-06T12:21:40Z A New Tail-Based Correlation Measure and Its Application in Global Equity Markets Liu, Jinjing CORRELATION ASYMMETRIES TAIL DEPENDENCE HEAVY-TAILED DISTRIBUTIONS VALUE AT RISK EQUITY MARKET The co-dependence between assets tends to increase when the market declines. This paper develops a correlation measure focusing on market declines using the expected shortfall (ES), referred to as the ES-implied correlation, to improve the existing value at risk (VaR)-implied correlation. Simulations which define period-by-period true correlations show that the ES-implied correlation is much closer to true correlations than is the VaR-implied correlation with respect to average bias and root-mean-square error. More importantly, this paper develops a series of test statistics to measure and test correlation asymmetries, as well as to evaluate the impact of weights on the VaR-implied correlation and the ES-implied correlation. The test statistics indicate that the linear correlation significantly underestimates correlations between the US and the other G7 countries during market downturns, and the choice of weights does not have significant impact on the VaR-implied correlation or the ES-implied correlation. 2019-01-31T21:12:16Z 2019-01-31T21:12:16Z 2019-01 Working Paper http://documents.worldbank.org/curated/en/641081547753593928/A-New-Tail-Based-Correlation-Measure-and-Its-Application-in-Global-Equity-Markets http://hdl.handle.net/10986/31177 English Policy Research Working Paper;No. 8709 CC BY 3.0 IGO http://creativecommons.org/licenses/by/3.0/igo World Bank World Bank, Washington, DC Publications & Research Publications & Research :: Policy Research Working Paper
repository_type Digital Repository
institution_category Foreign Institution
institution Digital Repositories
building World Bank Open Knowledge Repository
collection World Bank
language English
topic CORRELATION ASYMMETRIES
TAIL DEPENDENCE
HEAVY-TAILED DISTRIBUTIONS
VALUE AT RISK
EQUITY MARKET
spellingShingle CORRELATION ASYMMETRIES
TAIL DEPENDENCE
HEAVY-TAILED DISTRIBUTIONS
VALUE AT RISK
EQUITY MARKET
Liu, Jinjing
A New Tail-Based Correlation Measure and Its Application in Global Equity Markets
relation Policy Research Working Paper;No. 8709
description The co-dependence between assets tends to increase when the market declines. This paper develops a correlation measure focusing on market declines using the expected shortfall (ES), referred to as the ES-implied correlation, to improve the existing value at risk (VaR)-implied correlation. Simulations which define period-by-period true correlations show that the ES-implied correlation is much closer to true correlations than is the VaR-implied correlation with respect to average bias and root-mean-square error. More importantly, this paper develops a series of test statistics to measure and test correlation asymmetries, as well as to evaluate the impact of weights on the VaR-implied correlation and the ES-implied correlation. The test statistics indicate that the linear correlation significantly underestimates correlations between the US and the other G7 countries during market downturns, and the choice of weights does not have significant impact on the VaR-implied correlation or the ES-implied correlation.
format Working Paper
author Liu, Jinjing
author_facet Liu, Jinjing
author_sort Liu, Jinjing
title A New Tail-Based Correlation Measure and Its Application in Global Equity Markets
title_short A New Tail-Based Correlation Measure and Its Application in Global Equity Markets
title_full A New Tail-Based Correlation Measure and Its Application in Global Equity Markets
title_fullStr A New Tail-Based Correlation Measure and Its Application in Global Equity Markets
title_full_unstemmed A New Tail-Based Correlation Measure and Its Application in Global Equity Markets
title_sort new tail-based correlation measure and its application in global equity markets
publisher World Bank, Washington, DC
publishDate 2019
url http://documents.worldbank.org/curated/en/641081547753593928/A-New-Tail-Based-Correlation-Measure-and-Its-Application-in-Global-Equity-Markets
http://hdl.handle.net/10986/31177
_version_ 1764473719805181952

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