Local normalization: Uncovering correlations in non-stationary financial time series

Rudi Schäfer and Thomas Guhr

Physica A: Statistical Mechanics and its Applications, 2010, vol. 389, issue 18, 3856-3865

Abstract: The measurement of correlations between financial time series is of vital importance for risk management. In this paper we address an estimation error that stems from the non-stationarity of the time series. We put forward a method to rid the time series of local trends and variable volatility, while preserving cross-correlations. We test this method in a Monte Carlo simulation, and apply it to empirical data for the S&P 500 stocks.

Keywords: Econophysics; Financial correlations; Non-stationarity; Time series analysis (search for similar items in EconPapers)
Date: 2010
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Citations: View citations in EconPapers (13)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:phsmap:v:389:y:2010:i:18:p:3856-3865

DOI: 10.1016/j.physa.2010.05.030

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