Is the Correlation in International Equity Returns Constant: 1960-1990 ?

F. Longin, B. SOLNIK

Journal of International Money and Finance

février 1995, vol. 14, n°1, pp.3-26

Départements : Finance

We study the correlation of monthly excess returns for seven major countries over the period 1960-90. We find that the international covariance and correlation matrices are unstable over time. A multivariate GARCH(1,1) model with constant conditional correlation helps to capture some of the evolution in the conditional covariance structure. However tests of specific deviations lead to a rejection of the hypothesis of a constant conditional correlation. An explicit modelling of the conditional correlation indicates an increase of the international correlation between markets over the past thirty years. We also find that the correlation rises in periods of high volatility. There is some preliminary evidence that economic variables such as the dividend yield and interest rates contain information about future volatility and correlation that is not contained in past returns alone