Dynamic of consumer groups and response of commodity markets by principal component analysis
Shafiqul Alam and
Jae Woo Lee
Physica A: Statistical Mechanics and its Applications, 2017, vol. 482, issue C, 337-344
This study investigates financial states and group dynamics by applying principal component analysis to the cross-correlation coefficients of the daily returns of commodity futures. The eigenvalues of the cross-correlation matrix in the 6-month timeframe displays similar values during 2010–2011, but decline following 2012. A sharp drop in eigenvalue implies the significant change of the market state. Three commodity sectors, energy, metals and agriculture, are projected into two dimensional spaces consisting of two principal components (PC). We observe that they form three distinct clusters in relation to various sectors. However, commodities with distinct features have intermingled with one another and scattered during severe crises, such as the European sovereign debt crises. We observe the notable change of the position of two dimensional spaces of groups during financial crises. By considering the first principal component (PC1) within the 6-month moving timeframe, we observe that commodities of the same group change states in a similar pattern, and the change of states of one group can be used as a warning for other group.
Keywords: Principal component analysis; Commodity market; European sovereign debt crisis (search for similar items in EconPapers)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:phsmap:v:482:y:2017:i:c:p:337-344
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