A New Look on Financial Markets Co-Movement through Cooperative Dynamics in Many-Body Physics

Area of Science:

• Finance
• Quantitative Finance
• Market Dynamics

Background:

• The Capital Assets Pricing Model (CAPM) posits that market indexes largely explain the correlation between assets.
• Understanding stock co-movement is crucial for portfolio theory and risk management.

Purpose of the Study:

• To empirically verify the extent to which a market index explains the co-movement of stocks.
• To investigate stock correlations beyond the traditional market beta factor.

Main Methods:

• Analysis of a sample of 3,000 U.S. stocks, selected based on liquidity, capitalization, and free float criteria.
• Application of functions inspired by cooperative dynamics in physical particle systems to model stock co-movement.

Main Results:

• The study demonstrates that the market index completely explains the co-movement among the selected stocks.
• This explanatory power holds true even when market beta is not considered in the analysis.

Conclusions:

• The findings support the hypothesis that market-wide factors are the primary drivers of stock correlations.
• The research suggests a simplified approach to understanding asset co-movement within portfolio theory.