Time-varying correlations and interrelations: Firm-level-based sector evidence

P. Evans, David G. McMillan (Lead / Corresponding author), Fiona J. McMillan

    Research output: Contribution to journalArticlepeer-review

    2 Citations (Scopus)


    Using firm-level data, we examine stock market correlations and interrelations for the G7 over the period 2000-2013. An examination using aggregate market data supports the view that correlations have risen and particularly so during crisis periods. Using firm-level data, which is tradeable, we establish sector portfolios. We consider three regression approaches. The results support, first, that correlations using firm data are lower than those observed using aggregate market index data. Second, the most important driver for home sector returns is the home market followed by the corresponding US sector. Third, correlations rose during the crisis but have stabilised and even fallen since. This supports the view that markets fall together but rise apart. Fourth, there is evidence that most sector correlations follow a market-wide component, but some sector correlations follow their own component. Subsequently, we examine the key drivers of time-varying correlations. We find that the market-wide component of correlations increases in a US bear market as well as with higher US market volatility and lower US interest rates. However, on a sector basis, there are notable exceptions with some correlations falling in a bear market. Together, these results support the view that diversification benefits remain across market sectors.

    Original languageEnglish
    Pages (from-to)209-221
    Number of pages13
    JournalJournal of Asset Management
    Issue number3
    Early online date19 Dec 2016
    Publication statusPublished - 1 May 2017


    • correlations
    • firm-level
    • sectors
    • stock markets
    • time-varying

    ASJC Scopus subject areas

    • Business and International Management
    • Strategy and Management
    • Information Systems and Management


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