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Handling risk-on/risk-off dynamics with correlation regimes and correlation networks

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  • Jochen Papenbrock

    ()

  • Peter Schwendner

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Abstract

In this paper, we present a framework for detecting distinct correlation regimes and analyzing the emerging state dependences for a multi-asset futures portfolio from 1998 to 2013. These correlation regimes have been significantly different since the financial crisis of 2008 than they were previously; cluster tracking shows that asset classes are now less separated. We identify distinct “risk-on” and “risk-off” assets with the help of correlation networks. In addition to visualizing, we quantify these observations using suitable metrics for the clusters and correlation networks. The framework will be useful for financial risk management, portfolio construction, and asset allocation. Copyright Swiss Society for Financial Market Research 2015

Suggested Citation

  • Jochen Papenbrock & Peter Schwendner, 2015. "Handling risk-on/risk-off dynamics with correlation regimes and correlation networks," Financial Markets and Portfolio Management, Springer;Swiss Society for Financial Market Research, vol. 29(2), pages 125-147, May.
  • Handle: RePEc:kap:fmktpm:v:29:y:2015:i:2:p:125-147
    DOI: 10.1007/s11408-015-0248-2
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    File URL: http://hdl.handle.net/10.1007/s11408-015-0248-2
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    References listed on IDEAS

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    1. Tola, Vincenzo & Lillo, Fabrizio & Gallegati, Mauro & Mantegna, Rosario N., 2008. "Cluster analysis for portfolio optimization," Journal of Economic Dynamics and Control, Elsevier, vol. 32(1), pages 235-258, January.
    2. R. Mantegna, 1999. "Hierarchical structure in financial markets," The European Physical Journal B: Condensed Matter and Complex Systems, Springer;EDP Sciences, vol. 11(1), pages 193-197, September.
    3. Michael C. Munnix & Takashi Shimada & Rudi Schafer & Francois Leyvraz Thomas H. Seligman & Thomas Guhr & H. E. Stanley, 2012. "Identifying States of a Financial Market," Papers 1202.1623, arXiv.org.
    4. Laurent Laloux & Pierre Cizeau & Jean-Philippe Bouchaud & Marc Potters, 1999. "Random matrix theory," Science & Finance (CFM) working paper archive 500052, Science & Finance, Capital Fund Management.
    5. Tumminello, Michele & Lillo, Fabrizio & Mantegna, Rosario N., 2010. "Correlation, hierarchies, and networks in financial markets," Journal of Economic Behavior & Organization, Elsevier, vol. 75(1), pages 40-58, July.
    6. Laurent Laloux & Pierre Cizeau & Jean-Philippe Bouchaud & Marc Potters, 1999. "Random matrix theory and financial correlations," Science & Finance (CFM) working paper archive 500053, Science & Finance, Capital Fund Management.
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    Cited by:

    1. Gautier Marti & Frank Nielsen & Miko{l}aj Bi'nkowski & Philippe Donnat, 2017. "A review of two decades of correlations, hierarchies, networks and clustering in financial markets," Papers 1703.00485, arXiv.org, revised May 2018.
    2. repec:kap:compec:v:51:y:2018:i:3:d:10.1007_s10614-016-9627-7 is not listed on IDEAS

    More about this item

    Keywords

    Regime switching; Correlation regimes; Clustering ; Correlation networks; Risk management; Portfolio construction; Asset allocation; C14; G11; G01; D85;

    JEL classification:

    • C14 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Semiparametric and Nonparametric Methods: General
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G01 - Financial Economics - - General - - - Financial Crises
    • D85 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Network Formation

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