An analysis of market correlations: Empirical evidence with international data 1990-1999

Abstract

The thesis concentrates on market return correlations. The returns are computed in the local and in the Finnish currencies from 20th December 1990 to 31st December 1999. Correlations, the two forms of semicorrelations as well as the correlations in three different time periods, are calculated. Correlations are also predicted by the market volatilities.

The theory of the thesis rests upon Finnish and foreign studies. Different correlations are tested and compared in order to find a correlation structure for an investor in the international stock markets. The data consists of time series from three databases.

The results support the view that the correlations tend to be stronger between the geographically narrow markets than in the intercontinental relations. Another observation is that the above-zero market returns correlate stronger than the below-zero market returns.

The regression models are used for predicting future correlations with the Finnish stock market. The results indicate that the correlations increase when the market volatility grows.