Dynamics of market states and risk assessment

Hirdesh K. Pharasi, Eduard Seligman, Suchetana Sadhukhan, Parisa Majari and Thomas H. Seligman

Physica A: Statistical Mechanics and its Applications, 2024, vol. 633, issue C

Abstract: Previous research explored various conditions of financial markets based on the similarity of correlation structures and classified as market states. We introduce modifications to previous selection criteria for these market states, mainly due to increased attention to the transition matrix between the states. Clustering and thus market states are fixed by the optimization of two parameters — number of clusters and noise-suppression, but in similar conditions, we give preference to the clustering which avoids large jumps in the transition matrix. We found statistically significant results applying this model to the S&P 500 and Nikkei 225 markets for the pre-COVID-19 pandemic era (2006–2019). Retaining the epoch length of 20 trading days but reducing the shift of the epoch to a single trading day we are led to the concept of a trajectory of the market in the space of correlation matrices. We may visualize these states after dimensional scaling to two or three dimensions. This approach, using dynamics, improves the options of risk assessment, opens the door to dynamical treatments of markets (e.g. hedging), and shows noise-suppression in a new light.

Keywords: Complex systems; Market crash; Market state; Power mapping method; Multidimensional scaling; Risk assessment (search for similar items in EconPapers)
Date: 2024
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S0378437123009512
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:
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:633:y:2024:i:c:s0378437123009512

DOI: 10.1016/j.physa.2023.129396

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 ().