Dynamic correlations at different time-scales with empirical mode decomposition
T. Di Matteo and
Physica A: Statistical Mechanics and its Applications, 2018, vol. 502, issue C, 534-544
We introduce a simple approach which combines Empirical Mode Decomposition (EMD) and Pearson’s cross-correlations over rolling windows to quantify dynamic dependency at different time scales. The EMD is a tool to separate time series into implicit components which oscillate at different time-scales. We apply this decomposition to intraday time series of the following three financial indices: the S&P 500 (USA), the IPC (Mexico) and the VIX (volatility index USA), obtaining time-varying multidimensional cross-correlations at different time-scales. The correlations computed over a rolling window are compared across the three indices, across the components at different time-scales and across different time lags. We uncover a rich heterogeneity of interactions, which depends on the time-scale and has important lead–lag relations that could have practical use for portfolio management, risk estimation and investment decisions.
Keywords: Time-scale-dependent correlation; Time-dependent correlation; Empirical mode decomposition (search for similar items in EconPapers)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:phsmap:v:502:y:2018:i:c:p:534-544
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