Uncovering the Dynamics of Correlation Structures Relative to the Collective Market Motion

Abstract

The measured correlations of financial time series in subsequent epochs change considerably as a function of time. When studying the whole correlation matrices, quasi-stationary patterns, referred to as market states, are seen by applying clustering methods. They emerge, disappear or reemerge, but they are dominated by the collective motion of all stocks. In the jargon, one speaks of the market motion, it is always associated with the largest eigenvalue of the correlation matrices. Thus the question arises, if one can extract more refined information on the system by subtracting the dominating market motion in a proper way. To this end we introduce a new approach by clustering reduced-rank correlation matrices which are obtained by subtracting the dyadic matrix belonging to the largest eigenvalue from the standard correlation matrices. We analyze daily data of 262 companies of the S&P 500 index over a period of almost 15 years from 2002 to 2016. The resulting dynamics is remarkably different, and the corresponding market states are quasi-stationary over a long period of time. Our approach adds to the attempts to separate endogenous from exogenous effects.

arXiv comment30 pages, 17 figures

References in corpus (16)

• Natural Scales in Geographical Patterns
• Noise Dressing of Financial Correlation Matrices
• A Random Matrix Approach to Cross-Correlations in Financial Data
• Evolution of worldwide stock markets, correlation structure and correlation based graphs
• Cleaning large correlation matrices: tools from random matrix theory
• Systematic analysis of group identification in stock markets
• Community detection for correlation matrices
• Systemic risk and spatiotemporal dynamics of the US housing market
• Emergence of time-horizon invariant correlation structure in financial returns by subtraction of the market mode
• Kullback-Leibler distance as a measure of the information filtered from multivariate data
• Dissecting cross-impact on stock markets: An empirical analysis
• Non-Stationarity in Financial Time Series and Generic Features
• Identifying long-term precursors of financial market crashes using correlation patterns
• Stability and Hierarchy of Quasi-Stationary States: Financial Markets as an Example
• Zooming into market states
• Ultrametricity in Fund of Funds Diversification

Cited by in corpus (29)

• Collective correlations, dynamics, and behavioural inconsistencies of the cryptocurrency market over time
• Dynamics, behaviours, and anomaly persistence in cryptocurrencies and equities surrounding COVID-19
• Economic state classification and portfolio optimisation with application to stagflationary environments
• A new measure between sets of probability distributions with applications to erratic financial behavior
• Collective dynamics, diversification and optimal portfolio construction for cryptocurrencies
• Leveraging Variational Autoencoders for Parameterized MMSE Estimation
• Quasi-stationary states in temporal correlations for traffic systems: Cologne orbital motorway as an example
• A New Attempt to Identify Long-term Precursors for Endogenous Financial Crises in the Market Correlation Structures
• Evolutionary correlation, regime switching, spectral dynamics and optimal trading strategies for cryptocurrencies and equities
• An exploration of the mathematical structure and behavioural biases of 21st century financial crises
• Spatial Correlation Analysis of Traffic Flow on Parallel Motorways in Germany
• Collective behavior in the North Rhine-Westphalia motorway network
• New Collectivity Measures for Financial Covariances and Correlations
• Memory Effects, Multiple Time Scales and Local Stability in Langevin Models of the S&P500 Market Correlation
• On the systemic nature of global inflation, its association with equity markets and financial portfolio implications
• Identifying subdominant collective effects in a large motorway network
• Identifying Dominant Industrial Sectors in Market States of the S&P 500 Financial Data
• Non-stationarity in correlation matrices for wind turbine SCADA-data and implications for failure detection
• Transitions between quasi-stationary states in traffic systems: Cologne orbital motorways as an example
• Efficient Multi-Change Point Analysis to decode Economic Crisis Information from the S&P500 Mean Market Correlation
• Collective infectivity of the pandemic over time and association with vaccine coverage and economic development
• Detecting imbalanced financial markets through time-varying optimization and nonlinear functionals
• On financial market correlation structures and diversification benefits across and within equity sectors
• Multivariate Distributions in Non-Stationary Complex Systems I: Random Matrix Model and Formulae for Data Analysis
• COVID anomaly in the correlation analysis of S&P 500 market states
• Nonlinear shifts and dislocations in financial market structure and composition
• A New Traders' Game? -- Empirical Analysis of Response Functions in a Historical Perspective
• Dynamics of the market states in the space of correlation matrices with applications to financial markets
• Multivariate Distributions in Non-Stationary Complex Systems II: Empirical Results for Correlated Stock Markets