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The reaction of stock markets to crashes and events: A comparison study between emerging and mature markets using wavelet transforms

Listed author(s):
  • Sharkasi, Adel
  • Crane, Martin
  • Ruskin, Heather J.
  • Matos, Jose A.
Registered author(s):

    We study here the behaviour of the first three eigenvalues (λ1,λ2,λ3) and their ratios [(λ1/λ2),(λ1/λ3),(λ2/λ3)] of the covariance matrices of the original return series and of those rebuilt from wavelet components for emerging and mature markets. It has been known for some time that the largest eigenvalue (λ1) contains information on the risk associated with the particular assets of which the covariance matrix is comprised. Here, we wish to ascertain whether the subdominant eigenvalues (λ2,λ3) hold information on the risk of the stock market and also to measure the recovery time for emerging and mature markets. To do this, we use the discrete wavelet transform which gives a clear picture of the movements in the return series by reconstructing them using each wavelet component. Our results appear to indicate that mature markets respond to crashes differently to emerging ones, in that emerging markets may take up to two months to recover while major markets take less than a month to do so. In addition, the results appears to show that the subdominant eigenvalues (λ2,λ3) give additional information on market movement, especially for emerging markets and that a study of the behaviour of the other eigenvalues may provide insight on crash dynamics.

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    Article provided by Elsevier in its journal Physica A: Statistical Mechanics and its Applications.

    Volume (Year): 368 (2006)
    Issue (Month): 2 ()
    Pages: 511-521

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    Handle: RePEc:eee:phsmap:v:368:y:2006:i:2:p:511-521
    DOI: 10.1016/j.physa.2005.12.048
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    1. Vasiliki Plerou & Parameswaran Gopikrishnan & Bernd Rosenow & Luis A. Nunes Amaral & H. Eugene Stanley, 1999. "Universal and non-universal properties of cross-correlations in financial time series," Papers cond-mat/9902283,
    2. Galluccio, Stefano & Bouchaud, Jean-Philippe & Potters, Marc, 1998. "Rational decisions, random matrices and spin glasses," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 259(3), pages 449-456.
    3. Sandeep Patel & Asani Sarkar, 1998. "Stock market crises in developed and emerging markets," Research Paper 9809, Federal Reserve Bank of New York.
    4. Salomons, Roelof & Grootveld, Henk, 2002. "The equity risk premium: emerging versus developed markets," Research Report 02E45, University of Groningen, Research Institute SOM (Systems, Organisations and Management).
    5. Sharifi, S. & Crane, M. & Shamaie, A. & Ruskin, H., 2004. "Random matrix theory for portfolio optimization: a stability approach," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 335(3), pages 629-643.
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    7. Matteo, T. Di & Aste, T. & Dacorogna, Michel M., 2005. "Long-term memories of developed and emerging markets: Using the scaling analysis to characterize their stage of development," Journal of Banking & Finance, Elsevier, vol. 29(4), pages 827-851, April.
    8. repec:dgr:rugsom:02e45 is not listed on IDEAS
    9. Plerou, V. & Gopikrishnan, P. & Rosenow, B. & Amaral, L.A.N. & Stanley, H.E., 2001. "Collective behavior of stock price movements—a random matrix theory approach," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 299(1), pages 175-180.
    10. Pafka, Szilárd & Kondor, Imre, 2003. "Noisy covariance matrices and portfolio optimization II," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 319(C), pages 487-494.
    11. Kwapień, J & Drożdż, S & Speth, J, 2004. "Time scales involved in emergent market coherence," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 337(1), pages 231-242.
    12. Ilhan Meric & Gulser Meric, 1997. "Co-Movements of European Equity Markets Before and After the 1987 Crash," Multinational Finance Journal, Multinational Finance Journal, vol. 1(2), pages 137-152, June.
    13. Wilcox, Diane & Gebbie, Tim, 2004. "On the analysis of cross-correlations in South African market data," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 344(1), pages 294-298.
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