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Emergence of time-horizon invariant correlation structure in financial returns by subtraction of the market mode

  • Christian Borghesi
  • Matteo Marsili
  • Salvatore Miccich\`e
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    We investigate the emergence of a structure in the correlation matrix of assets' returns as the time-horizon over which returns are computed increases from the minutes to the daily scale. We analyze data from different stock markets (New York, Paris, London, Milano) and with different methods. Result crucially depends on whether the data is restricted to the ``internal'' dynamics of the market, where the ``center of mass'' motion (the market mode) is removed or not. If the market mode is not removed, we find that the structure emerges, as the time-horizon increases, from splitting a single large cluster. In NYSE we find that when the market mode is removed, the structure of correlation at the daily scale is already well defined at the 5 minutes time-horizon, and this structure accounts for 80 % of the classification of stocks in economic sectors. Similar results, though less sharp, are found for the other markets. We also find that the structure of correlations in the overnight returns is markedly different from that of intraday activity.

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    Paper provided by in its series Papers with number physics/0702106.

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    Date of creation: Feb 2007
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    Publication status: Published in Phys. Rev. E, 76, 026104 (2005)
    Handle: RePEc:arx:papers:physics/0702106
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