Testing for Asymmetric Stock Correlations During Market Declines

Summary

The document asks whether correlations among stocks increase when equity indices fall and which models could capture or test that pattern. The answer points readers to research on asymmetric correlations in equity portfolios and extreme correlations across international equity markets. It also notes that the latter research considers implications for portfolio selection and investor utility.

For empirical modeling, the response names GARCH-based approaches, including BEKK and DCC, as ways to represent time-varying correlation. It also identifies copulas as a general framework for capturing asymmetric dependence. The document offers these as relevant research directions and model families, rather than presenting an estimation procedure, dataset, or test result. It does not establish that correlations always rise during declines, nor does it compare the models’ assumptions or performance. A researcher would need to define a downturn condition, choose an appropriate dependence measure and sample, and assess whether any estimated asymmetry is robust.

Key ideas

• The question concerns whether stock dependence changes asymmetrically when markets decline.
• The cited research addresses asymmetric equity portfolio correlations and extreme international market correlations.
• BEKK and DCC GARCH models can represent time-varying correlations.
• Copulas can model asymmetric dependence more generally.
• The document suggests research and model families but reports no empirical result or model comparison.

Tags

# Does the correlation amongst stocks rise when stock values decline?


# Does the correlation amongst stocks rise when stock values decline?












Is there any research on whether the correlations among stocks rise when stock indices decline? Which model could account and test for that effect ? Maybe GARCH-BEKK, or some models using copulas?

## Answer by jlowin (score 1, accepted)

https://quant.stackexchange.com/a/4116

You will probably be interested in the following papers:

- Ang & Chen: Asymmetric Correlations of Equity Portfolios

- Longin & Solnik: Extreme Correlation of International Equity Markets



The last paper goes further into exploring the implications of asymmetric correlation on portfolio selection and investor utility.

As you mention, GARCH-based methods like BEKK or DCC can address time-varying correlation and copulas are a good way to capture asymmetric dependence more generally.

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