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Implied Correlation from VaR

Author

Listed:
  • John Cotter

    (University College Dublin)

  • Francois Longin

    (ESSEC Graduate Business School, France)

Abstract

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).

Suggested Citation

  • John Cotter & Francois Longin, 2011. "Implied Correlation from VaR," Working Papers 200618, Geary Institute, University College Dublin.
    • Handle: RePEc:ucd:wpaper:200618
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    References listed on IDEAS

    as
    1. Andrew Ang & Geert Bekaert, 2002. "International Asset Allocation With Regime Shifts," The Review of Financial Studies, Society for Financial Studies, vol. 15(4), pages 1137-1187.
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    4. Longin, Francois M., 2000. "From value at risk to stress testing: The extreme value approach," Journal of Banking & Finance, Elsevier, vol. 24(7), pages 1097-1130, July.
    5. Kristin J. Forbes & Roberto Rigobon, 2002. "No Contagion, Only Interdependence: Measuring Stock Market Comovements," Journal of Finance, American Finance Association, vol. 57(5), pages 2223-2261, October.
    6. François Longin & Bruno Solnik, 2001. "Extreme Correlation of International Equity Markets," Journal of Finance, American Finance Association, vol. 56(2), pages 649-676, April.
    7. repec:bla:jfinan:v:59:y:2004:i:6:p:2809-2834 is not listed on IDEAS
    8. Ramchand, Latha & Susmel, Raul, 1998. "Volatility and cross correlation across major stock markets," Journal of Empirical Finance, Elsevier, vol. 5(4), pages 397-416, October.
    9. Brian H. Boyer & Michael S. Gibson & Mico Loretan, 1997. "Pitfalls in tests for changes in correlations," International Finance Discussion Papers 597, Board of Governors of the Federal Reserve System (U.S.).
    10. Campa, Jose Manuel & Chang, P. H. Kevin, 1998. "The forecasting ability of correlations implied in foreign exchange options," Journal of International Money and Finance, Elsevier, vol. 17(6), pages 855-880, December.
    Full references (including those not matched with items on IDEAS)

    Citations

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    Cited by:

    1. Mittnik, Stefan, 2014. "VaR-implied tail-correlation matrices," Economics Letters, Elsevier, vol. 122(1), pages 69-73.
    2. Zhou, Xinmiao & Qian, Huanhuan & Pérez-Rodríguez, Jorge. V. & González López-Valcárcel, Beatriz, 2020. "Risk dependence and cointegration between pharmaceutical stock markets: The case of China and the USA," The North American Journal of Economics and Finance, Elsevier, vol. 52(C).
    3. Liu, Jinjing, 2023. "A novel downside beta and expected stock returns," International Review of Financial Analysis, Elsevier, vol. 85(C).

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    More about this item

    Keywords

    Implied Correlation; Value at Risk;

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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