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Collective behavior of stock price movements in an emerging market

Listed author(s):
  • Raj Kumar Pan
  • Sitabhra Sinha

To investigate the universality of the structure of interactions in different markets, we analyze the cross-correlation matrix C of stock price fluctuations in the National Stock Exchange (NSE) of India. We find that this emerging market exhibits strong correlations in the movement of stock prices compared to developed markets, such as the New York Stock Exchange (NYSE). This is shown to be due to the dominant influence of a common market mode on the stock prices. By comparison, interactions between related stocks, e.g., those belonging to the same business sector, are much weaker. This lack of distinct sector identity in emerging markets is explicitly shown by reconstructing the network of mutually interacting stocks. Spectral analysis of C for NSE reveals that, the few largest eigenvalues deviate from the bulk of the spectrum predicted by random matrix theory, but they are far fewer in number compared to, e.g., NYSE. We show this to be due to the relative weakness of intra-sector interactions between stocks, compared to the market mode, by modeling stock price dynamics with a two-factor model. Our results suggest that the emergence of an internal structure comprising multiple groups of strongly coupled components is a signature of market development.

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Paper provided by in its series Papers with number 0704.0773.

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Date of creation: Apr 2007
Date of revision: Nov 2007
Publication status: Published in Phys. Rev. E 76, 046116 (2007) (9 pages)
Handle: RePEc:arx:papers:0704.0773
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