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Bridge over ocean
1 January 2000 Financial Analysts Journal Volume 56, Issue 1

Dispersion as Cross-Sectional Correlation

  1. Bruno H. Solnik
  2. Jacques Roulet

We introduce the concept of cross-sectional dispersion of stock market returns as an alternative to the time-series approach to estimating the global correlation level of equity markets. Our objective is to derive a simple, instantaneous measure of the general level of global market correlation. Our cross-sectional method of estimating global correlation is dynamic and, using cross-sectional data, gives instantaneous information on the trend of global correlation. The traditional time-series method requires a long period of observations, and overlapping data have to be used to study the change in correlation. Both methods yield similar estimates for a “long” period, however, so a combination of the cross-sectional and time-series approaches should be of practical use to global asset managers.

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