Is there any research on whether the correlations among stocks rise when stock indices decline? Which model could account and test for that effect ? Maybe GARCH-BEKK, or some models using copulas?
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1$\begingroup$ Conditional correlations do rise (this can be show via a simple R simulation) when overall volatility increases. It would be interesting to see if research if the unconditional correlations rise as well $\endgroup$– Ram AhluwaliaApr 25, 2012 at 2:07
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$\begingroup$ I believe I've read that unconditional correlation increases also. $\endgroup$– QbikApr 26, 2012 at 13:21
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You will probably be interested in the following papers:
Ang & Chen: Asymmetric Correlations of Equity Portfolios
Longin & Solnik: Extreme Correlation of International Equity Markets
Hong et al: Asymmetric Correlation of Stock Returns: Statistical Tests and Economic Evaluation
The last paper goes further into exploring the implications of asymmetric correlation on portfolio selection and investor utility.
As you mention, GARCH-based methods like BEKK or DCC can address time-varying correlation and copulas are a good way to capture asymmetric dependence more generally.
