Lead-lag cross-sectional structure and detection of correlated–anticorrelated regime shifts: Application to the volatilities of inflation and economic growth rates

Wei-Xing Zhou and Didier Sornette

Physica A: Statistical Mechanics and its Applications, 2007, vol. 380, issue C, 287-296

Abstract: We have recently introduced the “thermal optimal path” (TOP) method to investigate the real-time lead-lag structure between two time series. The TOP method consists in searching for a robust noise-averaged optimal path of the distance matrix along which the two time series have the greatest similarity. Here, we generalize the TOP method by introducing a more general definition of distance which takes into account possible regime shifts between positive and negative correlations. This generalization to track possible changes of correlation signs is able to identify possible transitions from one convention (or consensus) to another. Numerical simulations on synthetic time series verify that the new TOP method performs as expected even in the presence of substantial noise. We then apply it to investigate changes of convention in the dependence structure between the historical volatilities of the USA inflation rate and economic growth rate. Several measures show that the new TOP method significantly outperforms standard cross-correlation methods.

Keywords: Thermal optimal path; Time series; Inflation; GDP growth; Convention (search for similar items in EconPapers)
Date: 2007
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (23)

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S0378437107001781
Full text for ScienceDirect subscribers only. Journal offers the option of making the article available online on Science direct for a fee of $3,000

Related works:
Working Paper: Lead-lag cross-sectional structure and detection of correlated-anticorrelated regime shifts: Application to the volatilities of inflation and economic growth rates (2006)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:eee:phsmap:v:380:y:2007:i:c:p:287-296

DOI: 10.1016/j.physa.2007.02.114

Access Statistics for this article

Physica A: Statistical Mechanics and its Applications is currently edited by K. A. Dawson, J. O. Indekeu, H.E. Stanley and C. Tsallis

More articles in Physica A: Statistical Mechanics and its Applications from Elsevier
Bibliographic data for series maintained by Catherine Liu ().