Returns synchronization and daily correlation dynamics between international stock markets

The use of close-to-close returns underestimates returns correlation becaus e international stock markets have different trading hours. With the availa bility of 16:00 (London time) stock market series, we find dynamics of dail y correlation and covariance, estimated using two non-synchroneity adjustme nt procedures, to be substantially different from their synchronous counter parts. Conditional correlation may have different signs depending on the mo del and data type used. Other findings include volatility spillover from th e US to the UK (and France), and a reverse spillover which is not documente d before. Also, unlike previous findings, we found the increase in daily co rrelation is prominent only under extremely adverse conditions when a large negative return has been registered. (C) 2001 Elsevier Science B.V. All ri ghts reserved.