Emergence of Statistically Validated Financial Intraday Lead-Lag Relationships

17 Pages Posted: 3 Jan 2014

See all articles by Chester Curme

Chester Curme

Boston University

Michele Tumminello

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

Rosario N. Mantegna

University of Palermo

H. Eugene Stanley

Boston University - Center for Polymer Studies

Dror Y. Kenett

Financial Industry Regulatory Authority (FINRA); Johns Hopkins University

Date Written: January 1, 2014

Abstract

According to the leading models in modern finance, the presence of intraday lead-lag relationships between financial assets is negligible in efficient markets. With the advance of technology, however, markets have become more sophisticated. To determine whether this has resulted in an improved market efficiency, we investigate whether statistically significant lagged correlation relationships exist in financial markets. We introduce a numerical method to statistically validate links in correlation-based networks, and employ our method to study lagged correlation networks of equity returns in financial markets. Crucially, our statistical validation of lead-lag relationships accounts for multiple hypothesis testing over all stock pairs. In an analysis of intraday transaction data from the periods 2002-2003 and 2011-2012, we find a striking growth in the networks as we increase the frequency with which we sample returns. We compute how the number of validated links and the magnitude of correlations change with increasing sampling frequency, and compare the results between the two data sets. Finally, we compare topological properties of the directed correlation-based networks from the two periods using the in-degree and out-degree distributions and an analysis of three-node motifs. Our analysis suggests a growth in both the efficiency and instability of financial markets over the past decade.

Keywords: Multivariate Analysis, Correlation Based Networks, Bootstrap Validation, Lagged Correlations

Suggested Citation

Curme, Chester and Tumminello, Michele and Mantegna, Rosario Nunzio and Stanley, H. Eugene and Kenett, Dror Y., Emergence of Statistically Validated Financial Intraday Lead-Lag Relationships (January 1, 2014). Available at SSRN: https://ssrn.com/abstract=2373787 or http://dx.doi.org/10.2139/ssrn.2373787

Chester Curme (Contact Author)

Boston University ( email )

595 Commonwealth Avenue
Boston, MA 02215
United States

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

Rosario Nunzio Mantegna

University of Palermo ( email )

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

HOME PAGE: http://www.unipa.it/persone/docenti/m/rosario.mantegna

H. Eugene Stanley

Boston University - Center for Polymer Studies ( email )

Boston, MA 02215
United States

Dror Y. Kenett

Financial Industry Regulatory Authority (FINRA) ( email )

Washington, DC
United States

Johns Hopkins University ( email )

Baltimore, MD 20036-1984
United States

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