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Quantifying the Behavior of Stock Correlations Under Market Stress
Understanding correlations in complex systems is crucial in the face of turbulence, such as the ongoing financial crisis. However, in complex systems, such as financial systems, correlations are not constant but instead vary in time. Here we address the question of quantifying state-dependent correl...
Autores principales: | , , , , |
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Formato: | Online Artículo Texto |
Lenguaje: | English |
Publicado: |
Nature Publishing Group
2012
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Materias: | |
Acceso en línea: | https://www.ncbi.nlm.nih.gov/pmc/articles/PMC3475344/ https://www.ncbi.nlm.nih.gov/pubmed/23082242 http://dx.doi.org/10.1038/srep00752 |
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author | Preis, Tobias Kenett, Dror Y. Stanley, H. Eugene Helbing, Dirk Ben-Jacob, Eshel |
author_facet | Preis, Tobias Kenett, Dror Y. Stanley, H. Eugene Helbing, Dirk Ben-Jacob, Eshel |
author_sort | Preis, Tobias |
collection | PubMed |
description | Understanding correlations in complex systems is crucial in the face of turbulence, such as the ongoing financial crisis. However, in complex systems, such as financial systems, correlations are not constant but instead vary in time. Here we address the question of quantifying state-dependent correlations in stock markets. Reliable estimates of correlations are absolutely necessary to protect a portfolio. We analyze 72 years of daily closing prices of the 30 stocks forming the Dow Jones Industrial Average (DJIA). We find the striking result that the average correlation among these stocks scales linearly with market stress reflected by normalized DJIA index returns on various time scales. Consequently, the diversification effect which should protect a portfolio melts away in times of market losses, just when it would most urgently be needed. Our empirical analysis is consistent with the interesting possibility that one could anticipate diversification breakdowns, guiding the design of protected portfolios. |
format | Online Article Text |
id | pubmed-3475344 |
institution | National Center for Biotechnology Information |
language | English |
publishDate | 2012 |
publisher | Nature Publishing Group |
record_format | MEDLINE/PubMed |
spelling | pubmed-34753442012-10-18 Quantifying the Behavior of Stock Correlations Under Market Stress Preis, Tobias Kenett, Dror Y. Stanley, H. Eugene Helbing, Dirk Ben-Jacob, Eshel Sci Rep Article Understanding correlations in complex systems is crucial in the face of turbulence, such as the ongoing financial crisis. However, in complex systems, such as financial systems, correlations are not constant but instead vary in time. Here we address the question of quantifying state-dependent correlations in stock markets. Reliable estimates of correlations are absolutely necessary to protect a portfolio. We analyze 72 years of daily closing prices of the 30 stocks forming the Dow Jones Industrial Average (DJIA). We find the striking result that the average correlation among these stocks scales linearly with market stress reflected by normalized DJIA index returns on various time scales. Consequently, the diversification effect which should protect a portfolio melts away in times of market losses, just when it would most urgently be needed. Our empirical analysis is consistent with the interesting possibility that one could anticipate diversification breakdowns, guiding the design of protected portfolios. Nature Publishing Group 2012-10-18 /pmc/articles/PMC3475344/ /pubmed/23082242 http://dx.doi.org/10.1038/srep00752 Text en Copyright © 2012, Macmillan Publishers Limited. All rights reserved http://creativecommons.org/licenses/by-nc-sa/3.0/ This work is licensed under a Creative Commons Attribution-NonCommercial-ShareALike 3.0 Unported License. To view a copy of this license, visit http://creativecommons.org/licenses/by-nc-sa/3.0/ |
spellingShingle | Article Preis, Tobias Kenett, Dror Y. Stanley, H. Eugene Helbing, Dirk Ben-Jacob, Eshel Quantifying the Behavior of Stock Correlations Under Market Stress |
title | Quantifying the Behavior of Stock Correlations Under Market Stress |
title_full | Quantifying the Behavior of Stock Correlations Under Market Stress |
title_fullStr | Quantifying the Behavior of Stock Correlations Under Market Stress |
title_full_unstemmed | Quantifying the Behavior of Stock Correlations Under Market Stress |
title_short | Quantifying the Behavior of Stock Correlations Under Market Stress |
title_sort | quantifying the behavior of stock correlations under market stress |
topic | Article |
url | https://www.ncbi.nlm.nih.gov/pmc/articles/PMC3475344/ https://www.ncbi.nlm.nih.gov/pubmed/23082242 http://dx.doi.org/10.1038/srep00752 |
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