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Multiscaled Cross-Correlation Dynamics in Financial Time-Series

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  • Thomas Conlon
  • Heather J. Ruskin
  • Martin Crane

Abstract

The cross correlation matrix between equities comprises multiple interactions between traders with varying strategies and time horizons. In this paper, we use the Maximum Overlap Discrete Wavelet Transform to calculate correlation matrices over different timescales and then explore the eigenvalue spectrum over sliding time windows. The dynamics of the eigenvalue spectrum at different times and scales provides insight into the interactions between the numerous constituents involved. Eigenvalue dynamics are examined for both medium and high-frequency equity returns, with the associated correlation structure shown to be dependent on both time and scale. Additionally, the Epps effect is established using this multivariate method and analyzed at longer scales than previously studied. A partition of the eigenvalue time-series demonstrates, at very short scales, the emergence of negative returns when the largest eigenvalue is greatest. Finally, a portfolio optimization shows the importance of timescale information in the context of risk management.

Suggested Citation

  • Thomas Conlon & Heather J. Ruskin & Martin Crane, 2010. "Multiscaled Cross-Correlation Dynamics in Financial Time-Series," Papers 1001.0497, arXiv.org.
  • Handle: RePEc:arx:papers:1001.0497
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    1. Pissarides,, 2009. "Labour Market Adjustment," Cambridge Books, Cambridge University Press, number 9780521106061.
    2. UNCITRAL & INSOL & World Bank, 2009. "Eighth Joint Multinational Judicial Colloquium," World Bank Other Operational Studies 12806, The World Bank.
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    4. repec:pal:jorsoc:v:60:y:2009:i:11:d:10.1057_jors.2009.92 is not listed on IDEAS
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    1. repec:spr:jeicoo:v:12:y:2017:i:3:d:10.1007_s11403-016-0176-x is not listed on IDEAS
    2. Silvo Dajcman, 2012. "The Dynamics of Return Comovement and Spillovers Between the Czech and European Stock Markets in the Period 1997–2010," Czech Journal of Economics and Finance (Finance a uver), Charles University Prague, Faculty of Social Sciences, vol. 62(4), pages 368-390, August.
    3. repec:exl:2manag:v:17:y:2016:i:1:p:59-75 is not listed on IDEAS
    4. Henryk Gurgul & Artur Machno, 2017. "The impact of asynchronous trading on Epps effect on Warsaw Stock Exchange," Central European Journal of Operations Research, Springer;Slovak Society for Operations Research;Hungarian Operational Research Society;Czech Society for Operations Research;Österr. Gesellschaft für Operations Research (ÖGOR);Slovenian Society Informatika - Section for Operational Research;Croatian Operational Research Society, vol. 25(2), pages 287-301, June.
    5. Zhang, Yiting & Lee, Gladys Hui Ting & Wong, Jian Cheng & Kok, Jun Liang & Prusty, Manamohan & Cheong, Siew Ann, 2011. "Will the US economy recover in 2010? A minimal spanning tree study," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 390(11), pages 2020-2050.

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