New Evidence of Systemic Risk and Correlation Asymmetries from International Equity Markets

Abstract

This paper studies the shifts in international equity market regimes between bulls and bears, and the characteristics of equity returns within and across regimes. We find that during January 1990 to February 2011 the international equity markets were switching between one bull and two bear regimes. The first bear regime occurred during the period of 1990s (1990s-bear), while the second bear regime occurred during the period of 2000s (2000s-bear). Unlike the findings in the asymmetric correlation literature, we find that during the 1990s-bear regime, returns were more volatile but less correlated compared to those during the bull regime. This finding is not present when jumps are ignored. We also find that the 2000s-bear regime is worse than the 1990s-bear regime in the sense that returns had lower means, but higher volatilities and correlations during the 2000s-bear regime. In addition, systemic jumps during the bear regimes had become more frequent, but less extreme in expectation and had lower variance. The correlation of systemic jumps remains high in both of the bear regimes, while it is low during the bull regime. The result also shows that systemic jumps were more correlated compared to continuous components of returns during the bear regimes, but not during the bull regime.