Extreme Correlation of International Equity Markets.

Longin, F., & Solnik, B. (2001). Extreme Correlation of International Equity Markets. Journal of Finance, 56(2), 649-676.

Type

Journal article

Intellectual base

Primary research

Year

2001

DOI

10.1111/0022-1082.00340

Link

https://doi.org/10.1111/0022-1082.00340

Cited from

economics_finance, statistics_experimental_design

Cited by

2 citations across 2 artifacts.

Each citation links to the sentence it supports in the citing article.

Primes

• Apparent Variety Masks Shared Driver
  • In finance and portfolio construction, apparently diversified holdings share a hidden factor — sector, geography, currency, funding source — so that stress-period correlations rise toward unity; hedge-fund "alpha" that is really beta to a common risk factor is the same shape.

    This sourceShows that equity-return correlations rise sharply in bear-market / stress regimes, so apparently diversified holdings move together and the shared factor dominates idiosyncratic noise exactly when diversification was relied upon.

• Diversification
  • The 2008 financial crisis exposed precisely this confusion: portfolios that looked diversified by count were structurally undiversified because cross-asset correlations rose toward one under systemic stress.

    This sourceDocuments that cross-asset correlations rise toward one under market stress, destroying diversification precisely when it is most needed.

Verification

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