increased Correlation in Bear Markets
A number of studies have promded .evidence of increased correlations in global financiai market retums during bear markets. Other studies, haujever, have shown that some of this evidence may be biased. We derive an alternative to. prem(ni.s estimators for iptplied correlation that is based on measures of portfolio daionside risk an4 that: does not suffer from bias. Tlie unbiased quantik corrtlation estirmtes are directly applicable ta poTtfoUo optimization and to risk mmagement techniques in generaL This simple and practical method capt.ures the increasing correkiion in extreme market condititms while providing apragmstic approach to understanding correlation structure in muUivarkie retutn iistrihutions. Based on data for jntaTtational equih/ markets, we.found evidence of significant increased correlation in intemationai etiuity returns in bear markets. This finding
proves the importance of promding s tail-adjusted mean-variance covariance matrix.