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Evolution of Worldwide Stock Markets, Correlation Structure and Correlation Based Graphs

21 Pages Posted: 1 Aug 2011  

Dong-Ming Song

East China University of Science and Technology (ECUST)

Michele Tumminello

University of Palermo; Carnegie Mellon University - Department of Social and Decision Sciences

Wei-Xing Zhou

East China University of Science and Technology - School of Business

Rosario N. Mantegna

University of Palermo

Date Written: August 1, 2011

Abstract

We investigate the daily correlation present among market indices of stock exchanges located all over the world in the time period Jan 1996 - Jul 2009. We discover that the correlation among market indices presents both a fast and a slow dynamics. The slow dynamics reflects the development and consolidation of globalization. The fast dynamics is associated with critical events that originate in a specific country or region of the world and rapidly affect the global system. We provide evidence that the short term timescale of correlation among market indices is less than 3 trading months (about 60 trading days). The average values of the non diagonal elements of the correlation matrix, correlation based graphs and the spectral properties of the largest eigenvalues and eigenvectors of the correlation matrix are carrying information about the fast and slow dynamics of correlation of market indices. We introduce a measure of mutual information based on link co-occurrence in networks, in order to detect the fast dynamics of successive changes of correlation based graphs in a quantitative way.

Keywords: financial markets, globalization, correlation-based networks

JEL Classification: C49, F36, G15

Suggested Citation

Song, Dong-Ming and Tumminello, Michele and Zhou, Wei-Xing and Mantegna, Rosario N., Evolution of Worldwide Stock Markets, Correlation Structure and Correlation Based Graphs (August 1, 2011). Available at SSRN: https://ssrn.com/abstract=1899476 or http://dx.doi.org/10.2139/ssrn.1899476

Dong-Ming Song

East China University of Science and Technology (ECUST) ( email )

Shanghai
China

Michele Tumminello

University of Palermo ( email )

Viale delle Scienza
Palermo, Palermo 90128
Italy

Carnegie Mellon University - Department of Social and Decision Sciences ( email )

Pittsburgh, PA 15213-3890
United States

Wei-Xing Zhou

East China University of Science and Technology - School of Business ( email )

130 Meilong Road
Shanghai, 200237
China

Rosario Nunzio Mantegna (Contact Author)

University of Palermo ( email )

Dipartimento di Fisica
Viale delle Scienze, Edificio 18
Palermo, PA I-90128
Italy
+3909123899074 (Phone)
+3909123860815 (Fax)

HOME PAGE: http://ocs.unipa.it/Site/Rosario_Nunzio_Mantegna.html

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