Cross-correlation asymmetries and causal relationships between stock and market risk
AbstractWe 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 shows that the dependence between the risks becomes linear near such events and the maximum value of this averaged cross-correlation function is often shifted with respect to zero lag. 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.
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Bibliographic InfoPaper provided by arXiv.org in its series Papers with number 1401.8106.
Date of creation: Jan 2014
Date of revision: Apr 2014
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Web page: http://arxiv.org/
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