Extreme correlation of international equity markets

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.International equity markets; volatility; correlation and extreme value theory

Correlation Structure of International Equity Markets During Extremely Volatile Periods

Correlation in international equity returns is unstable over time. It has been suggested that the international correlation of large stock returns, especially negative ones, differs from that of usual returns. It is in periods of extreme negative returns that the benefits of international risk diversification are most desired and that the question of international correlation is most relevant to risk-averse agents. If return distributions are not multivariate normal, the usual standard deviation and correlation of returns do not provide sufficient information. Additional information can be gained by focusing directly on the properties of extreme returns. While the interest in stock market crashes and booms is large, no study has specifically focused on the correlation between large price movements. A major econometric issue is to specify the multivariate distribution of extreme returns implied by a given distribution of returns. In this paper, we work directly on large returns and study the dependence structure of international equity markets during extremely volatile periods. We use the results of extreme value theory to model the multivariate distribution of large returns, using monthly data from January 1959 to December 1996 for the five largest stock markets. We find that the correlation of large positive returns are not inconsistent with the assumption of multivariate normality. However, the correlation of large negative returns is much greater than expected, suggesting that the benefits of international risk reduction in extremely volatile periods have been overstated.international equity market; volatility; correlation; extreme value theory

The Peptidyl Prolyl Isomerase Rrd1 Regulates the Elongation of RNA Polymerase II during Transcriptional Stresses

Rapamycin is an anticancer agent and immunosuppressant that acts by inhibiting the TOR signaling pathway. In yeast, rapamycin mediates a profound transcriptional response for which the RRD1 gene is required. To further investigate this connection, we performed genome-wide location analysis of RNA polymerase II (RNAPII) and Rrd1 in response to rapamycin and found that Rrd1 colocalizes with RNAPII on actively transcribed genes and that both are recruited to rapamycin responsive genes. Strikingly, when Rrd1 is lacking, RNAPII remains inappropriately associated to ribosomal genes and fails to be recruited to rapamycin responsive genes. This occurs independently of TATA box binding protein recruitment but involves the modulation of the phosphorylation status of RNAPII CTD by Rrd1. Further, we demonstrate that Rrd1 is also involved in various other transcriptional stress responses besides rapamycin. We propose that Rrd1 is a novel transcription elongation factor that fine-tunes the transcriptional stress response of RNAPII

Margin requirements with intraday dynamics

Both in practice and in the academic literature, models for setting margin requirements in futures markets use daily closing price changes. However, financial markets have recently shown high intraday volatility, which could bring more risk than expected. Such a phenomenon is well documented in the literature on high-frequency data and has prompted some exchanges to set intraday margin requirements and ask intraday margin calls. This article proposes to set margin requirements by taking into account the intraday dynamics of market prices. Daily margin levels are obtained in two ways: first, by using daily price changes defined with different time-intervals (say from 3 pm to 3 pm on the following trading day instead of traditional closing times); second, by using 5-minute and 1-hour price changes and scaling the results to one day. An application to the FTSE 100 futures contract traded on LIFFE demonstrates the usefulness of this new approach.University College Dublin. Michael Smurfit Graduate School of Busines

Margin setting with high-frequency data

Both in practice and in the academic literature, models for setting margin requirements in futures markets classically use daily closing price changes. However, as well documented by research on high-frequency data, financial markets have recently shown high intraday volatility, which could bring more risk than expected. This paper tries to answer two questions relevant for margin committees in practice: is it right to compute margin levels based on closing prices and ignoring intraday dynamics? Is it justified to implement intraday margin calls? The paper focuses on the impact of intraday dynamics of market prices on daily margin levels. Daily margin levels are obtained in two ways: first, by using daily price changes defined with different time-intervals (say from 3 pm to 3 pm on the following trading day instead of traditional closing times); second, by using 5-minute and 1-hour price changes and scaling the results to one day. Our empirical analysis uses the FTSE 100 futures contract traded on LIFFE.University College Dublin. Smurfit School of BusinessESSEC Business SchoolAvailable on the Munich Personal RePEc Archive, Paper No. 352

Implied correlation from VaR

Value at risk (VaR) is a risk measure that has been widely implemented by financial institutions. This paper measures the correlation among asset price changes implied from VaR calculation. Empirical results using US and UK equity indexes show that implied correlation is not constant but tends to be higher for events in the left tails (crashes) than in the right tails (booms).University College Dublin. Michael Smurfit Graduate School of Busines

Value at Risk : Une nouvelle approche fondée sur les valeurs extrêmes

This paper presents extreme value theory and its application to the computation of the value at risk of a position. This statistical theory allows quantification of the behavior of extreme moveme nts in prices and rates such that a new measure for catastrophe or bankruptcy risk can be defined. Empirically, it is shown that the Fréchet distribution models this type of movement well. Extreme movements are associated with both little tremors like market adjustments or corrections during ordinary periods, and also earthquake-like stock market crashes, bond market collapses or foreign exchange crises observed during extraordinary periods. The approach based on extreme values then covers market conditions ranging from the usual environemnt considered by the existing VaR methods to the financial crises which are the focus of stress testing. The approach based on extreme values is then applied to a position in the French stock market using extreme value theory which characterizes the limit distribution of extreme returns. This method is then compared to different methods of the traditional approach which describe the statistical behavior of all returns (the historic distribution, the normal distribution and conditional processes like the GARCH process or the exponential weighted moving average used in RiskMetrics™ used to describe the variance). These empirical results allow to evaluate the French regulation on market risks.