Abstract

http://ssrn.com/abstract=2170038
 


 



Quantifying the Behavior of Stock Correlations Under Market Stress


Tobias Preis


Warwick Business School - Behavioural Science Group; Boston University - Center for Polymer Studies; Artemis Capital Asset Management GmbH

Dror Y. Kenett


Boston University - Center for Polymer Studies

H. Eugene Stanley


Boston University - Center for Polymer Studies

Dirk Helbing


ETH Zürich - Department of Humanities, Social and Political Sciences (GESS); ETH Zürich

Eshel Ben-Jacob


Tel Aviv University

2012

Scientific Reports, Vol. 2, 2012, DOI:10.1038/srep00752

Abstract:     
Understanding correlations in complex systems is crucial in the face of turbulence, such as the ongoing financial crisis. However, in complex systems, such as financial systems, correlations are not constant but instead vary in time. Here we address the question of quantifying state-dependent correlations in stock markets. Reliable estimates of correlations are absolutely necessary to protect a portfolio. We analyze 72 years of daily closing prices of the 30 stocks forming the Dow Jones Industrial Average (DJIA). We find the striking result that the average correlation among these stocks scales linearly with market stress reflected by normalized DJIA index returns on various time scales. Consequently, the diversification effect which should protect a portfolio melts away in times of market losses, just when it would most urgently be needed. Our empirical analysis is consistent with the interesting possibility that one could anticipate diversification breakdowns, guiding the design of protected portfolios.

Number of Pages in PDF File: 5

Keywords: Financial Markets, Correlation Breakdown, Portfolio Theory, Stock Market, Dow Jones Industrial Average, State-Dependent Correlations, Diversification, Stock Market Crash

JEL Classification: A10, B40, C10, C20, C22, C53, C90, D70, D79, D83, J10, J11, O40, O47

Accepted Paper Series


Download This Paper

Date posted: November 2, 2012  

Suggested Citation

Preis, Tobias and Kenett, Dror Y. and Stanley, H. Eugene and Helbing, Dirk and Ben-Jacob, Eshel, Quantifying the Behavior of Stock Correlations Under Market Stress (2012). Scientific Reports, Vol. 2, 2012, DOI:10.1038/srep00752. Available at SSRN: http://ssrn.com/abstract=2170038

Contact Information

Tobias Preis (Contact Author)
Warwick Business School - Behavioural Science Group ( email )
University of Warwick
Coventry, CV4 7AL
United Kingdom
HOME PAGE: http://www.tobiaspreis.de
Boston University - Center for Polymer Studies ( email )
590 Commonwealth Avenue
Boston, MA 02215
United States
HOME PAGE: http://www.tobiaspreis.de
Artemis Capital Asset Management GmbH ( email )
Gartenstrasse 14
Holzheim, 65558
Germany
HOME PAGE: http://www.financialobservatory.org
Dror Y. Kenett
Boston University - Center for Polymer Studies ( email )
590 Commonwealth Avenue
Boston, MA 02215
United States
H. Eugene Stanley
Boston University - Center for Polymer Studies ( email )
Boston, MA 02215
United States
Dirk Helbing
Swiss Federal Institute of Technology Zurich - Department of Humanities, Social and Political Sciences (GESS) ( email )
ETH-Zentrum SEW E 26
CH-8092 Zurich
Switzerland
Swiss Federal Institute of Technology Zurich ( email )
Zürichbergstrasse 18
8092 Zurich, CH-1015
Switzerland
Eshel Ben-Jacob
Tel Aviv University ( email )
Ramat Aviv
Tel-Aviv
Israel
Feedback to SSRN


Paper statistics
Abstract Views: 1,104
Downloads: 268
Download Rank: 62,131

© 2014 Social Science Electronic Publishing, Inc. All Rights Reserved.  FAQ   Terms of Use   Privacy Policy   Copyright   Contact Us
This page was processed by apollo1 in 0.500 seconds