Correlation of financial markets in times of crisis
Leonidas Sandoval and
Italo De Paula Franca
Physica A: Statistical Mechanics and its Applications, 2012, vol. 391, issue 1, pages 187-208
Using the eigenvalues and eigenvectors of correlations matrices of some of the main financial market indices in the world, we show that high volatility of markets is directly linked with strong correlations between them. This means that markets tend to behave as one during great crashes. In order to do so, we investigate financial market crises that occurred in the years 1987 (Black Monday), 1998 (Russian crisis), 2001 (Burst of the dot-com bubble and September 11), and 2008 (Subprime Mortgage Crisis), which mark some of the largest downturns of financial markets in the last three decades.
Keywords: Financial markets; Crisis; Correlation matrix; Random matrix theory (search for similar items in EconPapers)
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Persistent link: http://EconPapers.repec.org/RePEc:eee:phsmap:v:391:y:2012:i:1:p:187-208
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