Temporal evolution of financial-market correlations.
We investigate financial market correlations using random matrix theory and principal component analysis. We use random matrix theory to demonstrate that correlation matrices of asset price changes contain structure that is incompatible with uncorrelated random price changes. We then identify the pr...
| Main Authors: | , , , , , |
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| Format: | Journal article |
| Language: | English |
| Published: |
2011
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| _version_ | 1826284359105118208 |
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| author | Fenn, D Porter, M Williams, S McDonald, M Johnson, N Jones, N |
| author_facet | Fenn, D Porter, M Williams, S McDonald, M Johnson, N Jones, N |
| author_sort | Fenn, D |
| collection | OXFORD |
| description | We investigate financial market correlations using random matrix theory and principal component analysis. We use random matrix theory to demonstrate that correlation matrices of asset price changes contain structure that is incompatible with uncorrelated random price changes. We then identify the principal components of these correlation matrices and demonstrate that a small number of components accounts for a large proportion of the variability of the markets that we consider. We characterize the time-evolving relationships between the different assets by investigating the correlations between the asset price time series and principal components. Using this approach, we uncover notable changes that occurred in financial markets and identify the assets that were significantly affected by these changes. We show in particular that there was an increase in the strength of the relationships between several different markets following the 2007-2008 credit and liquidity crisis. |
| first_indexed | 2024-03-07T01:12:39Z |
| format | Journal article |
| id | oxford-uuid:8d909e3b-fcc3-4d3e-ac80-b7d02b129778 |
| institution | University of Oxford |
| language | English |
| last_indexed | 2024-03-07T01:12:39Z |
| publishDate | 2011 |
| record_format | dspace |
| spelling | oxford-uuid:8d909e3b-fcc3-4d3e-ac80-b7d02b1297782022-03-26T22:52:02ZTemporal evolution of financial-market correlations.Journal articlehttp://purl.org/coar/resource_type/c_dcae04bcuuid:8d909e3b-fcc3-4d3e-ac80-b7d02b129778EnglishSymplectic Elements at Oxford2011Fenn, DPorter, MWilliams, SMcDonald, MJohnson, NJones, NWe investigate financial market correlations using random matrix theory and principal component analysis. We use random matrix theory to demonstrate that correlation matrices of asset price changes contain structure that is incompatible with uncorrelated random price changes. We then identify the principal components of these correlation matrices and demonstrate that a small number of components accounts for a large proportion of the variability of the markets that we consider. We characterize the time-evolving relationships between the different assets by investigating the correlations between the asset price time series and principal components. Using this approach, we uncover notable changes that occurred in financial markets and identify the assets that were significantly affected by these changes. We show in particular that there was an increase in the strength of the relationships between several different markets following the 2007-2008 credit and liquidity crisis. |
| spellingShingle | Fenn, D Porter, M Williams, S McDonald, M Johnson, N Jones, N Temporal evolution of financial-market correlations. |
| title | Temporal evolution of financial-market correlations. |
| title_full | Temporal evolution of financial-market correlations. |
| title_fullStr | Temporal evolution of financial-market correlations. |
| title_full_unstemmed | Temporal evolution of financial-market correlations. |
| title_short | Temporal evolution of financial-market correlations. |
| title_sort | temporal evolution of financial market correlations |
| work_keys_str_mv | AT fennd temporalevolutionoffinancialmarketcorrelations AT porterm temporalevolutionoffinancialmarketcorrelations AT williamss temporalevolutionoffinancialmarketcorrelations AT mcdonaldm temporalevolutionoffinancialmarketcorrelations AT johnsonn temporalevolutionoffinancialmarketcorrelations AT jonesn temporalevolutionoffinancialmarketcorrelations |