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Clustering financial time series with variance ratio statistics

João Bastos and Jorge Caiado ()

Quantitative Finance, 2014, vol. 14, issue 12, 2121-2133

Abstract: This study introduces a new distance measure for clustering financial time series based on variance ratio test statistics. The proposed metric attempts to assess the level of interdependence of time series from the point of view of return predictability. Simulation results show that this metric aggregates time series according to their serial dependence structure better than a metric based on the sample autocorrelations. An empirical application of this approach to international stock market returns is presented. The results suggest that this metric discriminates stock markets reasonably well according to size and the level of development. Furthermore, despite the substantial evolution of individual variance ratio statistics, the clustering pattern remains fairly stable across different time periods.

Date: 2014
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Working Paper: Clustering financial time series with variance ratio statistics (2009) Downloads
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