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Cross-Correlation Asymmetries and Causal Relationships between Stock and Market Risk
Stockholm University, Nordic Institute for Theoretical Physics (Nordita). Los Alamos National Laboratory, USA; KTH Royal Institute of Technology, Sweden.
Stockholm University, Nordic Institute for Theoretical Physics (Nordita). Los Alamos National Laboratory, USA.
2014 (English)In: PLoS ONE, ISSN 1932-6203, Vol. 9, no 8, e105874- p.Article in journal (Refereed) Published
Abstract [en]

We study historical correlations and lead-lag relationships between individual stock risk (volatility of daily stock returns) and market risk (volatility of daily returns of a market-representative portfolio) in the US stock market. We consider the cross-correlation functions averaged over all stocks, using 71 stock prices from the Standard & Poor's 500 index for 1994-2013. We focus on the behavior of the cross-correlations at the times of financial crises with significant jumps of market volatility. The observed historical dynamics showed that the dependence between the risks was almost linear during the US stock market downturn of 2002 and after the US housing bubble in 2007, remaining at that level until 2013. Moreover, the averaged cross-correlation function often had an asymmetric shape with respect to zero lag in the periods of high correlation. We develop the analysis by the application of the linear response formalism to study underlying causal relations. The calculated response functions suggest the presence of characteristic regimes near financial crashes, when the volatility of an individual stock follows the market volatility and vice versa.

Place, publisher, year, edition, pages
2014. Vol. 9, no 8, e105874- p.
National Category
Economics and Business Physical Sciences
URN: urn:nbn:se:su:diva-107803DOI: 10.1371/journal.pone.0105874ISI: 000340880900055OAI: diva2:752598

AuthorCount:2;[EGENBorysov, Stanislav S.]Stockholm Univ, S-10691 Stockholm, Sweden;[EGENBalatsky, Alexander V.]Stockholm Univ, S-10691 Stockholm, Sweden

Available from: 2014-10-05 Created: 2014-09-29 Last updated: 2014-10-05Bibliographically approved

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