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Correlation structure of extreme stock returns

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Author Info

  • Pierre Cizeau

    (Science & Finance, CFM)

  • Marc Potters

    (Science & Finance, CFM)

  • Jean-Philippe Bouchaud

    (Science & Finance, CFM
    CEA Saclay)

Abstract

It is commonly believed that the correlations between stock returns increase in high volatility periods. We investigate how much of these correlations can be explained within a simple non-Gaussian one-factor description with time independent correlations. Using surrogate data with the true market return as the dominant factor, we show that most of these correlations, measured by a variety of different indicators, can be accounted for. In particular, this one-factor model can explain the level and asymmetry of empirical exceedance correlations. However, more subtle effects require an extension of the one factor model, where the variance and skewness of the residuals also depend on the market return.

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Bibliographic Info

Paper provided by arXiv.org in its series Papers with number cond-mat/0006034.

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Date of creation: Jun 2000
Date of revision: Jan 2001
Publication status: Published in Quantitative Finance 1 217-222 (2001)
Handle: RePEc:arx:papers:cond-mat/0006034

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Web page: http://arxiv.org/

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References

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  1. Drożdż, S & Grümmer, F & Górski, A.Z & Ruf, F & Speth, J, 2000. "Dynamics of competition between collectivity and noise in the stock market," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 287(3), pages 440-449.
  2. Bekaert, Geert & Wu, Guojun, 2000. "Asymmetric Volatility and Risk in Equity Markets," Review of Financial Studies, Society for Financial Studies, vol. 13(1), pages 1-42.
  3. Jean-Philippe Bouchaud & Andrew Matacz & Marc Potters, 2001. "The leverage effect in financial markets: retarded volatility and market panic," Science & Finance (CFM) working paper archive 0101120, Science & Finance, Capital Fund Management.
  4. Fabrizio Lillo & Rosario N. Mantegna, 2000. "Symmetry alteration of ensemble return distribution in crash and rally days of financial markets," Science & Finance (CFM) working paper archive cond-mat/0002438, Science & Finance, Capital Fund Management.
  5. Campbell R. Harvey & Akhtar Siddique, 2000. "Conditional Skewness in Asset Pricing Tests," Journal of Finance, American Finance Association, vol. 55(3), pages 1263-1295, 06.
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Cited by:
  1. Fabrizio Lillo & Rosario N. Mantegna & Jean-Philippe Bouchaud & Marc Potters, 2001. "Introducing Variety in Risk Management," Science & Finance (CFM) working paper archive 0107208, Science & Finance, Capital Fund Management.
  2. Fabrizio Lillo & Giovanni Bonanno & Rosario N. Mantegna, 2001. "Variety of Stock Returns in Normal and Extreme Market Days: The August 1998 Crisis," Science & Finance (CFM) working paper archive cond-mat/0104362, Science & Finance, Capital Fund Management.
  3. Marco Airoldi & Vito Antonelli & Bruno Bassetti & Andrea Martinelli & Marco Picariello, 2004. "Long Range Interaction Generating Fat-Tails in Finance," GE, Growth, Math methods 0404006, EconWPA, revised 27 Apr 2004.
  4. V. Gontis, 2002. "Multiplicative Stochastic Model of the Time Interval between Trades in Financial Markets," Science & Finance (CFM) working paper archive cond-mat/0211317, Science & Finance, Capital Fund Management.
  5. Matthias Raddant & Friedrich Wagner, 2013. "Phase Transition in the S&P Stock Market," Kiel Working Papers 1846, Kiel Institute for the World Economy.
  6. Jean-Philippe Bouchaud, 2002. "An introduction to statistical finance," Science & Finance (CFM) working paper archive 313238, Science & Finance, Capital Fund Management.
  7. Y. Malevergne & D. Sornette, 2002. "Investigating Extreme Dependences: Concepts and Tools," Science & Finance (CFM) working paper archive cond-mat/0203166, Science & Finance, Capital Fund Management.
  8. Leonidas Sandoval Junior & Italo De Paula Franca, 2011. "Shocks in financial markets, price expectation, and damped harmonic oscillators," Science & Finance (CFM) working paper archive 1103.1992, Science & Finance, Capital Fund Management, revised Sep 2011.
  9. Leonidas Sandoval Junior & Italo De Paula Franca, 2011. "Correlation of financial markets in times of crisis," Science & Finance (CFM) working paper archive 1102.1339, Science & Finance, Capital Fund Management, revised Mar 2011.
  10. Sandoval, Leonidas & Franca, Italo De Paula, 2012. "Correlation of financial markets in times of crisis," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 391(1), pages 187-208.

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