Dispersion as Cross-Sectional Correlation

B. SOLNIK, J. Roulet

Financial Analysts Journal

January-February 2000, vol. 56, n°1, pp.54-61

Departments: Finance

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