Evolvement of uniformity and volatility in the stressed global financial village
AbstractIn the current era of strong worldwide market couplings the global financial village became highly prone to systemic collapses, events that can rapidly sweep through out the entire village. Here we present a new methodology to assess and quantify inter-market relations. The approach is based on the correlations between the market index, the index volatility, the market Index Cohesive Force and the meta-correlations (correlations between the intra-correlations.) We investigated the relations between six important world markets - U.S., U.K., Germany, Japan, China and India from January 2000 until December 2010. We found that while the developed ``western'' markets (U.S., U.K., Germany), are highly correlated, the interdependencies between these markets and the developing ``eastern'' markets (India and China) are very volatile and with noticeable maxima at times of global world events (2001: 9/11-attacks, 2003: Iraq war, SARS, etc). The Japanese market switches ``identity'' - it switches between periods of high meta-correlations with the ``western'' markets and periods that it behaves more similar to the ``eastern'' markets. These and additional reported findings illustrate that the methodological framework provides a way to quantify the evolvement of interdependencies in the global market, to evaluate a world financial network and quantify changes in the world inter market relations. Such changes can be used as precursors to the agitation of the global financial village. Hence, the new approach can help to develop a sensitive ``financial seismograph'' to detect early signs of global financial crises so they can be treated before developed into world wide events
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Bibliographic InfoPaper provided by Kiel Institute for the World Economy in its series Kiel Working Papers with number 1739.
Length: 27 pages
Date of creation: Oct 2011
Date of revision:
financial markets; comovement; financial crisis; stock correlations; networks;
Find related papers by JEL classification:
- G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
- F36 - International Economics - - International Finance - - - Financial Aspects of Economic Integration
This paper has been announced in the following NEP Reports:
- NEP-ALL-2011-11-07 (All new papers)
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