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Correlation of financial markets in times of crisis

Leonidas Sandoval Junior and Italo De Paula Franca

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Abstract: 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 several financial market crises that occurred in the years 1987 (Black Monday), 1989 (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.

New Economics Papers: this item is included in nep-cis and nep-rmg
Date: 2011-02, Revised 2011-03
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Published in Physica A 391 (2012) 187--208

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