Template-Type: ReDIF-Paper 1.0
Series: Tinbergen Institute Discussion Papers
Creation-Date: 2025-09-19
Number: 25-051/III
Author-Name: Etienne Wijler
Author-Workplace-Name: Vrije Universiteit Amsterdam
Author-Name: Andre Lucas
Author-Workplace-Name: Vrije Universiteit Amsterdam and Tinbergen Institute
Title: An Impartial Look at Asset Correlation Stability and Market Structure
Abstract: We develop a data-driven procedure to identify which correlations in high-dimensional dynamic systems should be time-varying, constant, or zero. The method integrates a vine-based multivariate partial correlation model with sequential penalized estimation. Applied to 50 US equities and systematic risk factors, results indicate that asset-level correlation dynamics are primarily induced by time-varying exposures to systematic factors. We further uncover persistent, non-zero, and occasionally time-varying partial correlations within industries, even after controlling for standard risk and industry factors. Finally, we show how the new methodology may be used to explore the relevance of systematic risk factors in an impartial way.
Classification-JEL: C32, C58
Keywords: conditional correlations, score-driven models, financial market structure, regularization
File-URL: https://papers.tinbergen.nl/25051.pdf
File-Format: application/pdf
File-Size: 1.004.515 bytes
Handle: RePEc:tin:wpaper:20250051