Analysis of Dynamic Correlation of Japanese Stock Returns with Network Clustering
Takashi Isogai ()
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Takashi Isogai: Bank of Japan
Asia-Pacific Financial Markets, 2017, vol. 24, issue 3, 193-220
Abstract In this paper, the dynamic correlation of Japanese stock returns is estimated by using the dynamic conditional correlation (DCC–GARCH) model to study their correlation dynamics empirically. It is difficult to fit the model to the whole stock market jointly at the same time; therefore, a network-based clustering is applied for the dimensionality reduction of the sample data. Two types correlation structures are estimated: homogeneous groups of stocks in a balanced size are created by clustering to observe within-group correlation, while a single portfolio that comprises group portfolio returns is also created to observe between-group correlation. The estimation result reveals dynamic changes in correlation intensity represented by the largest eigenvalue of the estimated correlation matrix. A higher level of correlation intensity and volatility are observed during the crisis periods, namely after both the Lehman collapse and the Great East Japan Earthquake, for the between- and within-group correlations. It is also confirmed that the pattern of correlation change is significantly different between the groups. The proposed method is useful for monitoring dynamic correlation of asset returns efficiently in a large scale of portfolio.
Keywords: Stock return; Dynamic correlation; DCC–GARCH; Dimensionality reduction; Network clustering (search for similar items in EconPapers)
JEL-codes: C58 C22 G19 (search for similar items in EconPapers)
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