Table of Contents Author Guidelines Submit a Manuscript
Discrete Dynamics in Nature and Society
Volume 2015, Article ID 263908, 8 pages
Research Article

Does Expectation of Correlation Breakdown in Financial Market Fulfill Itself?

1Department of Quantitative Methods, University of Brescia, 25121 Brescia, Italy
2Department of Statistics and Quantitative Methods, University of Milano-Bicocca, 20126 Milano, Italy

Received 10 November 2014; Revised 14 July 2015; Accepted 15 July 2015

Academic Editor: Cengiz Çinar

Copyright © 2015 Paolo Falbo and Rosanna Grassi. This is an open access article distributed under the Creative Commons Attribution License, which permits unrestricted use, distribution, and reproduction in any medium, provided the original work is properly cited.


This paper develops a model appeared in the literature whose focus was the way rational risk averse investors anticipate the correlation breakdowns of asset returns in periods of excess demand. That model analysed the dynamics of the “expected” returns of the risky asset, and their consistency with empirical evidence. However, the same model did not provide any evidence on actual correlation generated by the dynamics of returns. A model to link asset returns to excess demand is required to analyse the implied correlation between the securities traded. In this work we estimate such a model. Results confirm that the expected and ex-post correlation tend to move closely. In other words a self-fulfilling prophecy about correlation breakdown can take place, even when rational agents dominate the financial market.