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A spectral perspective on excess volatility

Listed author(s):
  • 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)

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.

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File URL: http://www.doctreballeco.uji.es/wpficheros/Livan_et_al_13_2014.pdf
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Paper provided by Economics Department, Universitat Jaume I, Castellón (Spain) in its series Working Papers with number 2014/13.

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Length: 9 pages
Date of creation: 2014
Handle: RePEc:jau:wpaper:2014/13
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  1. Mundt, Philipp & Förster, Niels & Alfarano, Simone & Milakovi?, Mishael, 2014. "The real versus the financial economy: A global tale of stability versus volatility," Economics - The Open-Access, Open-Assessment E-Journal, Kiel Institute for the World Economy (IfW), vol. 8, pages 1-26.
  2. Alfarano, Simone & Milaković, Mishael & Irle, Albrecht & Kauschke, Jonas, 2012. "A statistical equilibrium model of competitive firms," Journal of Economic Dynamics and Control, Elsevier, vol. 36(1), pages 136-149.
  3. G. Livan & S. Alfarano & E. Scalas, 2011. "The fine structure of spectral properties for random correlation matrices: an application to financial markets," Papers 1102.4076, arXiv.org.
  4. Toda, Alexis Akira, 2012. "The double power law in income distribution: Explanations and evidence," Journal of Economic Behavior & Organization, Elsevier, vol. 84(1), pages 364-381.
  5. Bottazzi, Giulio & Secchi, Angelo, 2003. "Why are distributions of firm growth rates tent-shaped?," Economics Letters, Elsevier, vol. 80(3), pages 415-420, September.
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