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A spectral perspective on excess volatility

Author

Listed:
  • Giacomo Livan

    (International Centre for Theoretical Physics, Trieste, Italy)

  • Simone Alfarano

    (Department of Economics, Universidad Jaume I, Castellón, Spain)

  • Mishael Milakovic

    (Department of Economics, University of Bamberg, Germany)

  • Enrico Scalas

    (Department of Mathematics, University of Sussex, UK)

Abstract

We perform a rather careful spectral analysis of the correlation structures observed in real and financial returns for a large pool of long-lived US corporations, and find that financial returns are characterized by strong collective fluctuations that are absent from real returns. Once the excessive comovement is subtracted from individual financial time series, the behavior of real and financial returns is virtually identical in both the cross-sectional and time series domain, thereby demonstrating the inherently collective nature of excess volatility. Put differently, if excess volatility is to be reduced then one should probably try to inhibit excess comovement first. At any rate, the excessive behavior in volatility and comovement should not be studied in isolation of each other.

Suggested Citation

  • Giacomo Livan & Simone Alfarano & Mishael Milakovic & Enrico Scalas, 2014. "A spectral perspective on excess volatility," Working Papers 2014/13, Economics Department, Universitat Jaume I, Castellón (Spain).
    • Handle: RePEc:jau:wpaper:2014/13
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    Cited by:

    1. Philipp Mundt & Simone Alfarano & Mishael Milaković, 2022. "Survival and the Ergodicity of Corporate Profitability," Management Science, INFORMS, vol. 68(5), pages 3726-3734, May.
    2. Chakrabarti, Arnab & Chakrabarti, Anindya S., 2020. "Fractional Differencing: (In)stability of Spectral Structure and Risk Measures of Financial Networks," IIMA Working Papers WP 2020-07-01, Indian Institute of Management Ahmedabad, Research and Publication Department.

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    Keywords

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    JEL classification:

    • D22 - Microeconomics - - Production and Organizations - - - Firm Behavior: Empirical Analysis
    • L10 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - General
    • C38 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Classification Methdos; Cluster Analysis; Principal Components; Factor Analysis

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