We examine the relation between correlation and variance in a conditional time and state varying framework. Using a switching ARCH (SWARCH) technique we document the finding that the correlations between the U.S. and other world stock markets are on average 2 to 3.5 times higher when the U.S....

Several papers have documented the fact that correlations across major stock markets are higher when markets are more volatile - this is done by comparing unconditional correlations over sub-periods or by using conditional correlations that are time varying. In this paper we examine the relation...