Emergence of correlations between securities at short time scales

S. Valeyre, D. S. Grebenkov and S. Aboura

Papers from arXiv.org

Abstract: The correlation matrix is the key element in optimal portfolio allocation and risk management. In particular, the eigenvectors of the correlation matrix corresponding to large eigenvalues can be used to identify the market mode, sectors and style factors. We investigate how these eigenvalues depend on the time scale of securities returns in the U.S. market. For this purpose, one-minute returns of the largest 533 U.S. stocks are aggregated at different time scales and used to estimate the correlation matrix and its spectral properties. We propose a simple lead-lag factor model to capture and reproduce the observed time-scale dependence of eigenvalues. We reveal the emergence of several dominant eigenvalues as the time scale increases. This important finding evidences that the underlying economic and financial mechanisms determining the correlation structure of securities depend as well on time scales.

Date: 2018-07
New Economics Papers: this item is included in nep-rmg
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

Published in Physica A 526, 121026 (2019)

Downloads: (external link)
http://arxiv.org/pdf/1807.05015 Latest version (application/pdf)

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:arx:papers:1807.05015

Access Statistics for this paper

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