Temporal evolution of financial-market correlations

Daniel J. Fenn, Mason A. Porter, Stacy Williams, Mark McDonald, Neil F Johnson, Nick S. Jones

Research output: Contribution to journalArticle

43 Citations (Scopus)

Abstract

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.

Original languageEnglish (US)
Article number026109
JournalPhysical Review E - Statistical, Nonlinear, and Soft Matter Physics
Volume84
Issue number2
DOIs
StatePublished - Aug 8 2011

Fingerprint

Correlation Matrix
Financial Markets
Random Matrix Theory
Principal Components
matrix theory
Liquidity
Number of Components
Principal Component Analysis
Demonstrate
Proportion
Time series
principal components analysis
proportion
Relationships
Market

ASJC Scopus subject areas

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

Cite this

Fenn, D. J., Porter, M. A., Williams, S., McDonald, M., Johnson, N. F., & Jones, N. S. (2011). Temporal evolution of financial-market correlations. Physical Review E - Statistical, Nonlinear, and Soft Matter Physics, 84(2), [026109]. https://doi.org/10.1103/PhysRevE.84.026109

Temporal evolution of financial-market correlations. / Fenn, Daniel J.; Porter, Mason A.; Williams, Stacy; McDonald, Mark; Johnson, Neil F; Jones, Nick S.

In: Physical Review E - Statistical, Nonlinear, and Soft Matter Physics, Vol. 84, No. 2, 026109, 08.08.2011.

Research output: Contribution to journalArticle

Fenn, DJ, Porter, MA, Williams, S, McDonald, M, Johnson, NF & Jones, NS 2011, 'Temporal evolution of financial-market correlations', Physical Review E - Statistical, Nonlinear, and Soft Matter Physics, vol. 84, no. 2, 026109. https://doi.org/10.1103/PhysRevE.84.026109
Fenn, Daniel J. ; Porter, Mason A. ; Williams, Stacy ; McDonald, Mark ; Johnson, Neil F ; Jones, Nick S. / Temporal evolution of financial-market correlations. In: Physical Review E - Statistical, Nonlinear, and Soft Matter Physics. 2011 ; Vol. 84, No. 2.
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