IDEAS home Printed from https://ideas.repec.org/a/taf/apfiec/v8y1998i4p359-365.html
   My bibliography  Save this article

The intertemporal stability of the covariance and correlation matrices of Hong Kong stock returns

Author

Listed:
  • Gordon Tang

Abstract

The intertemporal stability of the covariance matrix of stock returns is important in using ex-post factor structures on the APT and in portfolio optimization, while that of the correlation matrix is important in examining the ex-ante diversification benefits and stock return co-movements. By using Box's M test and an extension of the test, the intertemporal stability of the covariance and correlation matrices, respectively, of Hong Kong stock returns during the 1981-1992 time period are studied. Empirical results show that the covariance matrix of stock returns is less stable intertemporally than the corresponding correlation matrix and the results are robust across four different investment horizons. In general, the longer the investment horizon, the larger is the degree of intertemporal stability on both the covariance and correlation matrices of stock returns.

Suggested Citation

  • Gordon Tang, 1998. "The intertemporal stability of the covariance and correlation matrices of Hong Kong stock returns," Applied Financial Economics, Taylor & Francis Journals, vol. 8(4), pages 359-365.
  • Handle: RePEc:taf:apfiec:v:8:y:1998:i:4:p:359-365
    DOI: 10.1080/096031098332899
    as

    Download full text from publisher

    File URL: http://www.tandfonline.com/doi/abs/10.1080/096031098332899
    Download Restriction: Access to full text is restricted to subscribers.

    File URL: https://libkey.io/10.1080/096031098332899?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Stephen A. Ross, 2013. "The Arbitrage Theory of Capital Asset Pricing," World Scientific Book Chapters, in: Leonard C MacLean & William T Ziemba (ed.), HANDBOOK OF THE FUNDAMENTALS OF FINANCIAL DECISION MAKING Part I, chapter 1, pages 11-30, World Scientific Publishing Co. Pte. Ltd..
    2. Fama, Eugene F & French, Kenneth R, 1992. "The Cross-Section of Expected Stock Returns," Journal of Finance, American Finance Association, vol. 47(2), pages 427-465, June.
    3. Blume, Marshall E, 1975. "Betas and Their Regression Tendencies," Journal of Finance, American Finance Association, vol. 30(3), pages 785-795, June.
    4. Roll, Richard, 1977. "A critique of the asset pricing theory's tests Part I: On past and potential testability of the theory," Journal of Financial Economics, Elsevier, vol. 4(2), pages 129-176, March.
    5. Tang, Gordon Y. N., 1995. "Intertemporal stability in international stock market relationships: A revisit," The Quarterly Review of Economics and Finance, Elsevier, vol. 35(35), pages 579-593.
    6. Wahab, Mahmoud & Lashgari, Malek, 1993. "Covariance Stationarity of International Equity Markets Returns: Recent Evidence," The Financial Review, Eastern Finance Association, vol. 28(2), pages 239-260, May.
    7. William F. Sharpe, 1964. "Capital Asset Prices: A Theory Of Market Equilibrium Under Conditions Of Risk," Journal of Finance, American Finance Association, vol. 19(3), pages 425-442, September.
    8. Cho, David Chinhyung & Taylor, William M, 1987. "The Seasonal Stability of the Factor Structure of Stock Returns," Journal of Finance, American Finance Association, vol. 42(5), pages 1195-1211, December.
    9. Meric, Ilhan & Meric, Gulser, 1989. "Potential gains from international portfolio diversification and inter-temporal stability and seasonality in international stock market relationships," Journal of Banking & Finance, Elsevier, vol. 13(4-5), pages 627-640, September.
    10. Kaplanis, Evi C., 1988. "Stability and forecasting of the comovement measures of international stock market returns," Journal of International Money and Finance, Elsevier, vol. 7(1), pages 63-75, March.
    11. Dhrymes, Phoebus J & Friend, Irwin & Gultekin, N Bulent, 1984. "A Critical Reexamination of the Empirical Evidence on the Arbitrage Pricing Theory," Journal of Finance, American Finance Association, vol. 39(2), pages 323-346, June.
    12. Gultekin, Mustafa N & Gultekin, N Bulent, 1987. "Stock Return Anomalies and the Tests of the APT," Journal of Finance, American Finance Association, vol. 42(5), pages 1213-1224, December.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Giuseppe Brandi & Ruggero Gramatica & Tiziana Di Matteo, 2019. "Unveil stock correlation via a new tensor-based decomposition method," Papers 1911.06126, arXiv.org, revised Apr 2020.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Trabelsi, Mohamed Ali, 2010. "Choix de portefeuille: comparaison des différentes stratégies [Portfolio selection: comparison of different strategies]," MPRA Paper 82946, University Library of Munich, Germany, revised 01 Dec 2010.
    2. Erdinc Altay, 2003. "The Effect of Macroeconomic Factors on Asset Returns: A Comparative Analysis of the German and the Turkish Stock Markets in an APT Framework," Finance 0307006, University Library of Munich, Germany.
    3. Enrique Sentana, 1993. "The econometrics of the stock market II: asset pricing," Investigaciones Economicas, Fundación SEPI, vol. 17(3), pages 421-444, September.
    4. Moon K. Kim & Chunchi Wu, 1987. "Macro-Economic Factors And Stock Returns," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 10(2), pages 87-98, June.
    5. Committee, Nobel Prize, 2013. "Understanding Asset Prices," Nobel Prize in Economics documents 2013-1, Nobel Prize Committee.
    6. Jon Poynter & James Winder & Tzu Tai, 2015. "An analysis of co-movements in industrial sector indices over the last 30 years," Review of Quantitative Finance and Accounting, Springer, vol. 44(1), pages 69-88, January.
    7. Malevergne, Y. & Sornette, D., 2007. "Self-consistent asset pricing models," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 382(1), pages 149-171.
    8. García Iborra, Rafael & Howden, David, 2016. "Uses and Misuses of Arbitrage in Financial Theory, and a Suggested Alternative," MPRA Paper 79802, University Library of Munich, Germany.
    9. De Moor, Lieven & Sercu, Piet, 2013. "The smallest firm effect: An international study," Journal of International Money and Finance, Elsevier, vol. 32(C), pages 129-155.
    10. Shahzad, Syed Jawad Hussain & Zakaria, Muhammad & Raza, Naveed, 2014. "Sensitivity Analysis of CAPM Estimates: Data Frequency and Time Frame," MPRA Paper 60110, University Library of Munich, Germany.
    11. Asgar Ali & K. N. Badhani, 2021. "Beta-Anomaly: Evidence from the Indian Equity Market," Asia-Pacific Financial Markets, Springer;Japanese Association of Financial Economics and Engineering, vol. 28(1), pages 55-78, March.
    12. M. Eskandar Shah & Sourafel Girm & R. Hudson, 2012. "Rationalizing the Value Premium under Economic Fundamentals in an Emerging Market," Working Papers 12010, Bangor Business School, Prifysgol Bangor University (Cymru / Wales).
    13. Zura Kakushadze & Willie Yu, 2016. "Multifactor Risk Models and Heterotic CAPM," Papers 1602.04902, arXiv.org, revised Mar 2016.
    14. Frankfurter, George M. & Phillips, Herbert E., 1996. "Normative implications of equilibrium models: Homogeneous expectations and other artificialities," Journal of Economic Behavior & Organization, Elsevier, vol. 31(1), pages 67-83, October.
    15. Wayne E. Ferson & Ravi Jagannathan, 1996. "Econometric evaluation of asset pricing models," Staff Report 206, Federal Reserve Bank of Minneapolis.
    16. Kim, Soohun & Skoulakis, Georgios, 2018. "Ex-post risk premia estimation and asset pricing tests using large cross sections: The regression-calibration approach," Journal of Econometrics, Elsevier, vol. 204(2), pages 159-188.
    17. Misund, Bard & Mohn, Klaus, 2014. "Exploration Risk in Oil & Gas Shareholder Returns," UiS Working Papers in Economics and Finance 2014/4, University of Stavanger.
    18. Zura Kakushadze, 2015. "Heterotic Risk Models," Papers 1508.04883, arXiv.org, revised Jan 2016.
    19. Burkhard Pedell, 2007. "Kapitalmarktbasierte Ermittlung des Kapitalkostensatzes für Zwecke der Entgeltregulierung," Metrika: International Journal for Theoretical and Applied Statistics, Springer, vol. 18(1), pages 35-60, April.
    20. Martin Gold, 2010. "Fiduciary Finance," Books, Edward Elgar Publishing, number 13813.

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:taf:apfiec:v:8:y:1998:i:4:p:359-365. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Chris Longhurst (email available below). General contact details of provider: http://www.tandfonline.com/RAFE20 .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.