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Correlation structure of extreme stock returns


Author Info

  • Pierre Cizeau

    (Science & Finance, Capital Fund Management)

  • Marc Potters

    (Science & Finance, Capital Fund Management)

  • Jean-Philippe Bouchaud

    (Science & Finance, Capital Fund Management
    CEA Saclay;)


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 Science & Finance, Capital Fund Management in its series Science & Finance (CFM) working paper archive with number 0006034.

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Date of creation: Jun 2000
Date of revision:
Publication status: Published in Quantitative Finance 1 217-222 (2001)
Handle: RePEc:sfi:sfiwpa:0006034

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  1. Fabrizio Lillo & Rosario N. Mantegna, 2000. "Symmetry alteration of ensemble return distribution in crash and rally days of financial markets," Papers, cond-mat/0002438,
  2. 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, Elsevier, vol. 287(3), pages 440-449.
  3. Geert Bekaert & Guojun Wu, 1997. "Asymmetric Volatility and Risk in Equity Markets," NBER Working Papers, National Bureau of Economic Research, Inc 6022, National Bureau of Economic Research, Inc.
  4. Campbell R. Harvey & Akhtar Siddique, 2000. "Conditional Skewness in Asset Pricing Tests," Journal of Finance, American Finance Association, American Finance Association, vol. 55(3), pages 1263-1295, 06.
  5. repec:sfi:sfiwpa:0101120 is not listed on IDEAS
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Cited by:
  1. Anirban Chakraborti & Ioane Muni Toke & Marco Patriarca & Frédéric Abergel, 2011. "Econophysics: empirical facts," Post-Print, HAL hal-00621058, HAL.
  2. Fabrizio Lillo & Giovanni Bonanno & Rosario N. Mantegna, 2001. "Variety of Stock Returns in Normal and Extreme Market Days: The August 1998 Crisis," Papers, cond-mat/0104362,
  3. Leonidas Sandoval Junior & Italo De Paula Franca, 2011. "Shocks in financial markets, price expectation, and damped harmonic oscillators," Papers, 1103.1992,, revised Sep 2011.
  4. repec:sfi:sfiwpa:0107208 is not listed on IDEAS
  5. V. Gontis, 2002. "Multiplicative Stochastic Model of the Time Interval between Trades in Financial Markets," Papers, cond-mat/0211317,
  6. Y. Malevergne & D. Sornette, 2002. "Investigating Extreme Dependences: Concepts and Tools," Papers, cond-mat/0203166,
  7. Matthias Raddant & Friedrich Wagner, 2013. "Phase Transition in the S&P Stock Market," Papers, 1306.2508,
  8. Sandoval, Leonidas & Franca, Italo De Paula, 2012. "Correlation of financial markets in times of crisis," Physica A: Statistical Mechanics and its Applications, Elsevier, Elsevier, vol. 391(1), pages 187-208.
  9. Leonidas Sandoval Junior & Italo De Paula Franca, 2011. "Correlation of financial markets in times of crisis," Papers, 1102.1339,, revised Mar 2011.
  10. Anirban Chakraborti & Ioane Muni Toke & Marco Patriarca & Frederic Abergel, 2011. "Econophysics review: I. Empirical facts," Quantitative Finance, Taylor & Francis Journals, Taylor & Francis Journals, vol. 11(7), pages 991-1012.
  11. Marco Airoldi & Vito Antonelli & Bruno Bassetti & Andrea Martinelli & Marco Picariello, 2004. "Long Range Interaction Generating Fat-Tails in Finance," GE, Growth, Math methods, EconWPA 0404006, EconWPA, revised 27 Apr 2004.
  12. repec:sfi:sfiwpa:313238 is not listed on IDEAS
  13. Fabrizio Lillo & Rosario N. Mantegna & Jean-Philippe Bouchaud & Marc Potters, 2001. "Introducing Variety in Risk Management," Papers, cond-mat/0107208,


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