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Dynamics of cross-correlations in the stock market

✍ Scribed by Bernd Rosenow; Parameswaran Gopikrishnan; Vasiliki Plerou; H Eugene Stanley

Publisher
Elsevier Science
Year
2003
Tongue
English
Weight
107 KB
Volume
324
Category
Article
ISSN
0378-4371

No coin nor oath required. For personal study only.

✦ Synopsis

Co-movements of stock price uctuations are described by the cross-correlation matrix C. The application of random matrix theory (RMT) allows to distinguish between spurious correlations in C due to measurement noise and true correlations containing economically meaningful information. By calculating cross-correlations for di erent time windows, we study the time dependence of eigenvectors of C, which are related to economic sectors, and the time evolution of the largest eigenvalue, which describes the average correlation strength. We use these results to forecast cross-correlations, and test the quality of our forecast by constructing investments in the stock market which expose the invested capital to a minimum level of risk only.

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