Emergence of correlations between securities at short time scales

Sebastien Valeyre (), Denis Grebenkov () and Sofiane Aboura ()
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Denis Grebenkov: LPMC - Laboratoire de physique de la matière condensée - X - École polytechnique - IP Paris - Institut Polytechnique de Paris - CNRS - Centre National de la Recherche Scientifique
Sofiane Aboura: CEREG - Centre de Recherche sur la gestion et la Finance - DRM UMR 7088 - Université Paris Dauphine-PSL - PSL - Université Paris Sciences et Lettres - CNRS - Centre National de la Recherche Scientifique

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Abstract: The correlation matrix is the key element in optimal portfolio allocation and risk management. In particular, the eigenvectors of the correlation matrix corresponding to large eigenvalues can be used to identify the market mode, sectors and style factors. We investigate how these eigenvalues depend on the time scale of securities returns in the U.S. market. For this purpose, one-minute returns of the largest 533 U.S. stocks are aggregated at different time scales and used to estimate the correlation matrix and its spectral properties. We propose a simple lead-lag factor model to capture and reproduce the observed timescale dependence of eigenvalues. We reveal the emergence of several dominant eigenvalues as the time scale increases. This important finding evidences that the underlying economic and financial mechanisms determining the correlation structure of securities depend as well on time scales.

Keywords: Correlation matrix; Security returns; Time scale dependence; Lead–lag effect; Transaction impact; Market inefficiency (search for similar items in EconPapers)
Date: 2019
New Economics Papers: this item is included in nep-rmg
Note: View the original document on HAL open archive server: https://hal.science/hal-02343888v1
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Citations: View citations in EconPapers (3)

Published in Physica A: Statistical Mechanics and its Applications, 2019, 526, pp.121026. ⟨10.1016/j.physa.2019.04.262⟩

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Persistent link: https://EconPapers.repec.org/RePEc:hal:journl:hal-02343888

DOI: 10.1016/j.physa.2019.04.262

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