TAILIEUCHUNG - Systematic correlation is priced as risk factor

In this study, we first measure the systematic correlation level risk and systematic correlation shock risk based on mixed vine copula method and investigate their relationship with stock return. The empirical result shows that correlation is significantly and negatively priced as risk factor in China which is dynamic through different regimes. We find out that transformation mechanism between idiosyncratic correlation and systematic correlation is supported at stock-level and index-level. | Journal of Applied Finance Banking 2018 37-61 ISSN 1792-6580 print version 1792-6599 online Scienpress Ltd 2018 Systematic Correlation is Priced as Risk Factor Xiangying Meng1 Xianhua Wei2 Abstract In this study we first measure the systematic correlation level risk and systematic correlation shock risk based on mixed vine copula method and investigate their relationship with stock return. The empirical result shows that correlation is significantly and negatively priced as risk factor in China which is dynamic through different regimes. We find out that transformation mechanism between idiosyncratic correlation and systematic correlation is supported at stock-level and index-level. JEL Classification G11 G12 Keywords systematic correlation risk MacBeth regression regime-switching correlation transformation 1 Introduction Correlation is critical for asset allocation of investment portfolio as it reflects the level of diversification. The systematic correlation between asset and 1 School of Economics and Management University of Chinese Academy of Sciences. E-mail mengxy_91@ 2 School of Economics and Management University of Chinese Academy of Sciences. E-mail weixh@ Supported by the National Natural Science Foundation of China Grant No. 91546201 and Grant No. 71331005 Article Info Received July 19 2018. Revised August 12 2018. Published online November 1 2018. 38 Price of Correlation market is also important for several applications. For example low market-correlated portfolio is better immune to dramatic fall of net asset value in the downside market nevertheless portfolio consisting of those assets with high correlation to market perform better in the upside trending market. Previous researches on correlation have revealed the significant impact of correlation risk in financial market. Literatures such as Bollerslev 1988 1 and Longin and Solnic 1995 2 have shown that correlation in financial market is time variant and there is .

• Ngân hàng - Tín dụng
• Systematic correlation risk
• MacBeth regression
• Regime switching
• Correlation transformation
• Priced as risk factor