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Hierarchy, cluster, and time-stable information structure of correlations between international financial markets

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  • Cai, Yumei
  • Cui, Xiaomei
  • Huang, Qianyun
  • Sun, Jianqiang

Abstract

This paper investigates the correlations between 52 financial markets located in different countries or regions from July 2004 through June 2011. By using a correlation matrix time series and a participation frequency method based on the random matrix theory, we show that a time-stable information structure is contained in the correlations between global financial markets. We further find that the information structure is closely associated with global market and global geographical factors, and that each financial index's participation in the global market factor varies over time and presents dynamics. Two patterns, hierarchy and cluster effects, are found to be in the dynamics of the indices' participation in the global market factor. The cluster effect implies a more concentrated participation during the 2008 financial crisis.

Suggested Citation

  • Cai, Yumei & Cui, Xiaomei & Huang, Qianyun & Sun, Jianqiang, 2017. "Hierarchy, cluster, and time-stable information structure of correlations between international financial markets," International Review of Economics & Finance, Elsevier, vol. 51(C), pages 562-573.
    • Handle: RePEc:eee:reveco:v:51:y:2017:i:c:p:562-573
    DOI: 10.1016/j.iref.2017.07.024
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    References listed on IDEAS

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    Cited by:

    1. Mo, Guoli & Tan, Chunzhi & Zhang, Weiguo & Liu, Fang, 2019. "International portfolio of stock indices with spatiotemporal correlations: Can investors still benefit from portfolio, when and where?," The North American Journal of Economics and Finance, Elsevier, vol. 47(C), pages 168-183.
    2. Fernando Caneo & Werner Kristjanpoller, 2021. "Improving statistical arbitrage investment strategy: Evidence from Latin American stock markets," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 26(3), pages 4424-4440, July.

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    More about this item

    Keywords

    Correlation matrix; Random matrix theory; Portfolio; Information structure;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • C15 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Statistical Simulation Methods: General

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