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Evolution of worldwide stock markets, correlation structure, and correlation-based graphs
Dong-Ming Song1, Michele Tumminello, Wei-Xing Zhou
1School of Business, East China University of Science and Technology, Shanghai 200237, China.
Physical Review. E, Statistical, Nonlinear, and Soft Matter Physics
|September 21, 2011
Summary
Global stock market correlations exhibit distinct fast and slow dynamics. Slow dynamics reflect globalization, while fast dynamics are driven by critical global events, typically within 60 trading days.
Area of Science:
- Economics
- Financial Markets
- Network Science
Background:
- Global stock markets exhibit complex interdependencies.
- Understanding correlation dynamics is crucial for financial stability and globalization analysis.
Purpose of the Study:
- To investigate the daily correlation dynamics among global stock market indices.
- To differentiate between fast and slow dynamics in market correlations.
- To identify the time scales associated with these dynamics.
Main Methods:
- Analysis of daily stock market index correlations from January 1996 to July 2009.
- Examination of correlation matrices, correlation-based graphs, and spectral properties (eigenvalues/eigenvectors).
- Introduction of a mutual information measure for detecting rapid changes in correlation networks.
Main Results:
- Market index correlations display both slow (globalization) and fast (event-driven) dynamics.
- The short-term time scale for fast dynamics was found to be less than 60 trading days.
- Spectral properties and network analysis effectively capture these correlation dynamics.
Conclusions:
- Globalization influences market correlations over the long term.
- Short-term market correlations are sensitive to critical global events.
- Advanced network analysis provides quantitative insights into financial market dynamics.
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