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State and group dynamics of world stock market by principal component analysis

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  • Nobi, Ashadun
  • Lee, Jae Woo

Abstract

We study the dynamic interactions and structural changes by a principal component analysis (PCA) to cross-correlation coefficients of global financial indices in the years 1998–2012. The variances explained by the first PC increase with time and show a drastic change during the crisis. A sharp change in PC coefficient implies a transition of market state, a situation which occurs frequently in the American and Asian indices. However, the European indices remain stable over time. Using the first two PC coefficients, we identify indices that are similar and more strongly correlated than the others. We observe that the European indices form a robust group over the observation period. The dynamics of the individual indices within the group increase in similarity with time, and the dynamics of indices are more similar during the crises. Furthermore, the group formation of indices changes position in two-dimensional spaces due to crises. Finally, after a financial crisis, the difference of PCs between the European and American indices narrows.

Suggested Citation

  • Nobi, Ashadun & Lee, Jae Woo, 2016. "State and group dynamics of world stock market by principal component analysis," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 450(C), pages 85-94.
  • Handle: RePEc:eee:phsmap:v:450:y:2016:i:c:p:85-94
    DOI: 10.1016/j.physa.2015.12.144
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    References listed on IDEAS

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    Cited by:

    1. repec:eee:phsmap:v:482:y:2017:i:c:p:337-344 is not listed on IDEAS
    2. Jae Woo Lee & Ashadun Nobi, 2018. "State and Network Structures of Stock Markets around the Global Financial Crisis," Papers 1806.04363, arXiv.org.
    3. repec:kap:compec:v:51:y:2018:i:2:d:10.1007_s10614-017-9672-x is not listed on IDEAS

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