Extreme Correlation of International Equity Markets


  • François Longin,

  • Bruno Solnik

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    • Longin is director of the Department of Research and Innovation at HSBC CCF Group, a professor of finance at ESSEC and an affiliate of the CEPR. Solnik is a professor of finance at HEC. We would like to thank David Bates, Michael Brandt, Bernard Dumas, Paul Embrechts, Claudia Klüppelberg, Jérôme Legras, Jacques Olivier, Stefan Straetmans, and the participants at the Bachelier seminar (Paris, October 1997), London School of Economics, INSEAD, Universite de Genève, Université de Lausanne, the American Finance Association meetings (New York, January 1999), the French Finance Association meetings (Aix-en-Provence, June 1999), the workshop on “Extreme Value Theory and Financial Risk” at Münich University of Technology (Münich, November 1999) and the CCF Quants conference (Paris, November 1999) for their comments. Jonathan Tawn provided many useful suggestions. We also would like to thank René Stulz (the editor) and an anonymous referee whose comments and suggestions helped to greatly improve the quality of the paper. Longin benefited from the financial support of the CERESSEC research fund and the BSI GAMMA Foundation, and Solnik from the support of the Fondation HEC.


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. Using “extreme value theory” to model the multivariate distribution tails, we derive the distribution of extreme correlation for a wide class of return distributions. Empirically, 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.