Volatility-constrained correlation identifies the directionality of the influence between Japan’s Nikkei 225 and other financial markets

Tomoshiro Ochiai and Jose C. Nacher

Physica A: Statistical Mechanics and its Applications, 2014, vol. 393, issue C, 364-375

Abstract: Recent financial crises have shown the importance of determining the directionality of the influence between financial assets in order to identify the origin of market instabilities. Here, we analyze the correlation between Japan’s Nikkei stock average index (Nikkei 225) and other financial markets by introducing a volatility-constrained correlation metric. The asymmetric feature of the metric reveals which asset is more influential than the other. As a result, this method allows us to unveil the directionality of the correlation effect, which could not be observed from the standard correlation analysis. Furthermore, we present a theoretical model that reproduces the results observed in empirical analysis.

Keywords: Econophysics; Financial market; Data analysis; Correlation; Volatility; Multivariate stochastic model (search for similar items in EconPapers)
Date: 2014
References: View complete reference list from CitEc
Citations: View citations in EconPapers (5)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:phsmap:v:393:y:2014:i:c:p:364-375

DOI: 10.1016/j.physa.2013.08.038

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