A spectral perspective on excess volatility

Giacomo Livan (), Simone Alfarano, Mishael Milaković and Enrico Scalas

No 2014/13, Working Papers from Economics Department, Universitat Jaume I, Castellón (Spain)

Abstract: We perform a rather careful spectral analysis of the correlation structures observed in real and financial returns for a large pool of long-lived US corporations, and find that financial returns are characterized by strong collective fluctuations that are absent from real returns. Once the excessive comovement is subtracted from individual financial time series, the behavior of real and financial returns is virtually identical in both the cross-sectional and time series domain, thereby demonstrating the inherently collective nature of excess volatility. Put differently, if excess volatility is to be reduced then one should probably try to inhibit excess comovement first. At any rate, the excessive behavior in volatility and comovement should not be studied in isolation of each other.

Keywords: excess volatility; excess comovement; random matrix theory; profit rate; return on assets (search for similar items in EconPapers)
JEL-codes: C38 D22 L10 (search for similar items in EconPapers)
Pages: 9 pages
Date: 2014
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Citations: View citations in EconPapers (2)

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Related works:
Journal Article: A spectral perspective on excess volatility (2015)
Working Paper: A spectral perspective on excess volatility (2014)
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Persistent link: https://EconPapers.repec.org/RePEc:jau:wpaper:2014/13

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