[R-sig-finance] correlation between two stock market indices

[Christoph Lehmann]

Dear finance professionals

As I was asked by a friend, whether we can compute the correlation 
between two stock market indices (e.g. NASDAQ index and Dow Jones 
index), and I am unfortunately NOT an expert in finance:

(1) What model would you recommend for this kind of question?

something like:

library(ts)
arima(x, order=???, xreg=y)

library(nlme)
gls(x~y,correlation=corARMA(p=?,q=?))

what would you recommend, and what about the "?" :)

(2) Furthermore, searching the web, I found, that (sorry, you experts 
certainly know this, but I have no experience with financial data), 
usually the time series are uncorrelated, but show strong "ARCH 
effects", ie., are not independent.

Does this mean, that any kind of correlation analysis with stock market
indices is senseless, since maybe we don't get a sign. correlation, but 
this doesn't mean that the series are independent?

Many thanks for your help

Chris