EconPapers    
Economics at your fingertips  
 

Cross-Correlation Dynamics in Financial Time Series

Thomas Conlon (), Heather J. Ruskin and Martin Crane

Papers from arXiv.org

Abstract: The dynamics of the equal-time cross-correlation matrix of multivariate financial time series is explored by examination of the eigenvalue spectrum over sliding time windows. Empirical results for the S&P 500 and the Dow Jones Euro Stoxx 50 indices reveal that the dynamics of the small eigenvalues of the cross-correlation matrix, over these time windows, oppose those of the largest eigenvalue. This behaviour is shown to be independent of the size of the time window and the number of stocks examined. A basic one-factor model is then proposed, which captures the main dynamical features of the eigenvalue spectrum of the empirical data. Through the addition of perturbations to the one-factor model, (leading to a 'market plus sectors' model), additional sectoral features are added, resulting in an Inverse Participation Ratio comparable to that found for empirical data. By partitioning the eigenvalue time series, we then show that negative index returns, (drawdowns), are associated with periods where the largest eigenvalue is greatest, while positive index returns, (drawups), are associated with periods where the largest eigenvalue is smallest. The study of correlation dynamics provides some insight on the collective behaviour of traders with varying strategies.

Date: 2010-02
New Economics Papers: this item is included in nep-ecm and nep-ets
References: View references in EconPapers View complete reference list from CitEc
Citations: Track citations by RSS feed

Published in Physica A 388 (5) (2009), 705-714

Downloads: (external link)
http://arxiv.org/pdf/1002.0321 Latest version (application/pdf)

Related works:
Journal Article: Cross-correlation dynamics in financial time series (2009) Downloads
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:arx:papers:1002.0321

Access Statistics for this paper

More papers in Papers from arXiv.org
Bibliographic data for series maintained by arXiv administrators ().

 
Page updated 2021-09-23
Handle: RePEc:arx:papers:1002.0321