Market correlation structure changes around the Great Crash

Rui-Qi Han, Wen-Jie Xie, Xiong Xiong, Wei Zhang and Wei-Xing Zhou
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Rui-Qi Han: ECUST
Wen-Jie Xie: ECUST
Xiong Xiong: TJU
Wei Zhang: TJU

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Abstract: We perform a comparative analysis of the Chinese stock market around the occurrence of the 2008 crisis based on the random matrix analysis of high-frequency stock returns of 1228 stocks listed on the Shanghai and Shenzhen stock exchanges. Both raw correlation matrix and partial correlation matrix with respect to the market index in two time periods of one year are investigated. We find that the Chinese stocks have stronger average correlation and partial correlation in 2008 than in 2007 and the average partial correlation is significantly weaker than the average correlation in each period. Accordingly, the largest eigenvalue of the correlation matrix is remarkably greater than that of the partial correlation matrix in each period. Moreover, each largest eigenvalue and its eigenvector reflect an evident market effect, while other deviating eigenvalues do not. We find no evidence that deviating eigenvalues contain industrial sectorial information. Surprisingly, the eigenvectors of the second largest eigenvalues in 2007 and of the third largest eigenvalues in 2008 are able to distinguish the stocks from the two exchanges. We also find that the component magnitudes of the some largest eigenvectors are proportional to the stocks' capitalizations.

Date: 2016-01
New Economics Papers: this item is included in nep-fmk and nep-tra
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Published in Fluctuation and Noise Letters 16 (2), 1750018 (2017)

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