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A new approach to quantify power-law cross-correlation and its application to commodity markets

Ling-Yun He and Shu-Peng Chen

Physica A: Statistical Mechanics and its Applications, 2011, vol. 390, issue 21, 3806-3814

Abstract: We proposed a new method: Detrended Moving-average Cross-correlation Analysis (DMCA) to detect the power-law cross-correlation between two correlated non-stationary time series by combining Detrended Cross-Correlation Analysis (DCCA) and Detrended Moving Average (DMA). In order to compare the performance of DMCA and DCCA in the detection of cross-correlation, and to estimate the influence of periodic trend, we generate two cross-correlated time series x(i) and y(i) by a periodic two-component fractionally autoregressive integrated moving average (ARFIMA) process. Then we apply both methods to quantify the cross-correlations of the generated series, whose theoretical values are already known to us. By comparing the results we obtained, we find that the performance of this new approach is comparable to DCCA with less calculating amounts; our method can also reduce the impact of trends; furthermore, DMCA (for background and forward moving average case) outperforms DCCA in more accurate estimation when the analyzed times series are short in length. To provide an example, we also apply this new method to the time series of the real-world data from Brent and WTI crude oil spot markets, to investigate the complex cross-market correlation between these commodity markets. In all, our method is another practical choice to detect the cross-correlation between two short period non-stationary time series, and has potential application to real world problems.

Keywords: DMCA; DCCA; Power-law cross-correlation; Crude oil spot markets (search for similar items in EconPapers)
Date: 2011
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DOI: 10.1016/j.physa.2011.06.013

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