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Volatility-constrained correlation identifies the directionality of the influence between Japan’s Nikkei 225 and other financial markets

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  • Ochiai, Tomoshiro
  • Nacher, Jose C.

Abstract

Recent financial crises have shown the importance of determining the directionality of the influence between financial assets in order to identify the origin of market instabilities. Here, we analyze the correlation between Japan’s Nikkei stock average index (Nikkei 225) and other financial markets by introducing a volatility-constrained correlation metric. The asymmetric feature of the metric reveals which asset is more influential than the other. As a result, this method allows us to unveil the directionality of the correlation effect, which could not be observed from the standard correlation analysis. Furthermore, we present a theoretical model that reproduces the results observed in empirical analysis.

Suggested Citation

  • Ochiai, Tomoshiro & Nacher, Jose C., 2014. "Volatility-constrained correlation identifies the directionality of the influence between Japan’s Nikkei 225 and other financial markets," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 393(C), pages 364-375.
    • Handle: RePEc:eee:phsmap:v:393:y:2014:i:c:p:364-375
    DOI: 10.1016/j.physa.2013.08.038
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    Citations

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    Cited by:

    1. Hai-Chuan Xu & Wei Zhang & Xiong Xiong & Wei-Xing Zhou, 2014. "Wealth Share Analysis with “Fundamentalist/Chartist” Heterogeneous Agents," Abstract and Applied Analysis, Hindawi, vol. 2014, pages 1-11, May.
    2. Kanjamapornkul, Kabin & Pinčák, Richard & Bartoš, Erik, 2020. "Cohomology theory for financial time series," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 546(C).
    3. Tomoshiro Ochiai & Jose C. Nacher, 2020. "Unveiling the directional network behind the financial statements data using volatility constraint correlation," Papers 2008.07836, arXiv.org, revised Jun 2023.
    4. Ochiai, Tomoshiro & Nacher, Jose C., 2022. "Unveiling the directional network behind financial statements data using volatility constraint correlation," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 600(C).
    5. Cao, Guangxi & Zhang, Minjia & Li, Qingchen, 2017. "Volatility-constrained multifractal detrended cross-correlation analysis: Cross-correlation among Mainland China, US, and Hong Kong stock markets," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 472(C), pages 67-76.

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