Emergence of time-horizon invariant correlation structure in financial returns by subtraction of the market mode.

Salvatore Micciche', Matteo Marsili, Christian Borghesi

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43 Citazioni (Scopus)

Abstract

We investigate the emergence of a structure in the correlation matrix of assets' returns as the time horizon over which returns are computed increases from the minutes to the daily scale. We analyze data from different stock markets (New York, Paris, London, Milano) and with different methods. In addition to the usual correlations, we also analyze those obtained by subtracting the dynamics of the "center of mass" (i.e., the market mode). We find that when the center of mass is not removed the structure emerges, as the time horizon increases, from splitting a single large cluster into smaller ones. By contrast, when the market mode is removed the structure of correlations observed at the daily scale is already well defined at very high frequency (5 min in the New York Stock Exchange). Moreover, this structure accounts for 80% of the classification of stocks in economic sectors. Similar results, though less sharp, are found for the other markets. We also find that the structure of correlations in the overnight returns is markedly different from that of intraday activity.
Lingua originaleEnglish
pagine (da-a)026104-1-026104-13
Numero di pagine13
RivistaPHYSICAL REVIEW E, STATISTICAL, NONLINEAR, AND SOFT MATTER PHYSICS
Volume76
Stato di pubblicazionePublished - 2007

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Correlation Structure
Subtraction
subtraction
horizon
Horizon
Invariant
center of mass
Barycentre
very high frequencies
Correlation Matrix
economics
Stock Market
sectors
Well-defined
Sector
Market
Economics

All Science Journal Classification (ASJC) codes

  • Statistical and Nonlinear Physics
  • Statistics and Probability
  • Condensed Matter Physics

Cita questo

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abstract = "We investigate the emergence of a structure in the correlation matrix of assets' returns as the time horizon over which returns are computed increases from the minutes to the daily scale. We analyze data from different stock markets (New York, Paris, London, Milano) and with different methods. In addition to the usual correlations, we also analyze those obtained by subtracting the dynamics of the {"}center of mass{"} (i.e., the market mode). We find that when the center of mass is not removed the structure emerges, as the time horizon increases, from splitting a single large cluster into smaller ones. By contrast, when the market mode is removed the structure of correlations observed at the daily scale is already well defined at very high frequency (5 min in the New York Stock Exchange). Moreover, this structure accounts for 80{\%} of the classification of stocks in economic sectors. Similar results, though less sharp, are found for the other markets. We also find that the structure of correlations in the overnight returns is markedly different from that of intraday activity.",
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AU - Marsili, Matteo

AU - Borghesi, Christian

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N2 - We investigate the emergence of a structure in the correlation matrix of assets' returns as the time horizon over which returns are computed increases from the minutes to the daily scale. We analyze data from different stock markets (New York, Paris, London, Milano) and with different methods. In addition to the usual correlations, we also analyze those obtained by subtracting the dynamics of the "center of mass" (i.e., the market mode). We find that when the center of mass is not removed the structure emerges, as the time horizon increases, from splitting a single large cluster into smaller ones. By contrast, when the market mode is removed the structure of correlations observed at the daily scale is already well defined at very high frequency (5 min in the New York Stock Exchange). Moreover, this structure accounts for 80% of the classification of stocks in economic sectors. Similar results, though less sharp, are found for the other markets. We also find that the structure of correlations in the overnight returns is markedly different from that of intraday activity.

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