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Risk Appetite and Jumps in Realized Correlation

Author

Listed:
  • Riza Demirer

    (Department of Economics and Finance, School of Business, Southern Illinois University Edwardsville, Edwardsville, IL 62026-1102, USA)

  • Konstantinos Gkillas

    (Department of Management Science and Technology, University of Patras, 265 04 Patras, Greece)

  • Christos Kountzakis

    (Department of Statistics and Actuarial-Financial Mathematics, School of Sciences, University of the Aegean, 832 00 Samos, Greece)

  • Amaryllis Mavragani

    (Department of Computing Science and Mathematics, University of Stirling, Stirling FK9 4LA, UK)

Abstract

This paper examines the role of non-cash flow factors over correlation jumps in financial markets. Utilizing time-varying risk aversion measure as a proxy for investor sentiment and the cross-quantilogram method applied to intraday data, we show that risk aversion captures significant predictive power over realized stock-bond correlation jumps at different quantiles and lags. The predictive relation between correlation jumps and time-varying risk aversion is found to be asymmetric, as we detect a heterogeneous dependence pattern across different quantiles and lag orders. Our findings underline the importance of non-cash flow factors over correlation jumps, highlighting the role of behavioral factors in optimal portfolio allocations and the effectiveness of diversification strategies.

Suggested Citation

  • Riza Demirer & Konstantinos Gkillas & Christos Kountzakis & Amaryllis Mavragani, 2020. "Risk Appetite and Jumps in Realized Correlation," Mathematics, MDPI, vol. 8(12), pages 1-11, December.
    • Handle: RePEc:gam:jmathe:v:8:y:2020:i:12:p:2255-:d:465632
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    References listed on IDEAS

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    1. Konstantinos Gkillas & Christoforos Konstantatos & Costas Siriopoulos, 2021. "Uncertainty Due to Infectious Diseases and Stock–Bond Correlation," Econometrics, MDPI, vol. 9(2), pages 1-18, April.

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