Increased Correlation in Bear Markets - A Downside Risk Perspective

R.A.J. Campbell*, C.G. Koedijk, P. Kofman

*Corresponding author for this work

Research output: Contribution to journalArticleAcademicpeer-review


A number of studies have provided evidence of increased correlations in global financial market returns during bear markets. Other studies, however, have shown that some of this evidence may be biased. We derive an alternative to previous estimators for implied correlation that is based on measures of portfolio downside risk and that does not suffer from bias. The unbiased quantile correlation estimates are directly applicable to portfolio optimization and to risk management techniques in general. This simple and practical method captures the increasing correlation in extreme market conditions while providing a pragmatic approach to understanding correlation structure in multivariate return distributions. Based on data for international equity markets, we found evidence of significant increased correlation in international equity returns in bear markets. This finding proves the importance of providing a tail-adjusted mean-variance covariance matrix.
Original languageEnglish
Pages (from-to)87-94
JournalFinancial Analysts Journal
Issue number1
Publication statusPublished - 1 Jan 2002


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