Volatilities and Correlations in the Stock Market During the Global Financial Crisis

21 Pages Posted: 21 Aug 2015

See all articles by Chong Hui Tan

Chong Hui Tan

SIM University (UniSIM)

Ding Ding

SIM University (UniSIM)

Date Written: August 19, 2015

Abstract

This paper investigates the behaviour of volatilities and correlations in the U.S. stock market before, during and after the Global Financial Crisis of 2007-08. We study their nature using the DJIA index and its components for the period 21/11/2005-23/9/2012 by plotting the trajectories and transforming the returns series into visibility graphs and correlation networks. We observe volatility clustering of various forms in the time series of returns and uncover regular fluctuations in market correlations. We study the degree distributions of the visibility graphs and find that they agree with the scale-free property that has been found for many naturally occurring complex networks. Minimal spanning trees on the correlation networks allow the market to be interpreted as an integrated whole. Our approach allows us to analyze empirical observations with network theory. As market dynamics is complex, the use of graphical methods, which have been fruitfully employed to the study of complex networks, provides a new perspective in the interpretation of financial data.

Keywords: Correlation, Correlation Network, Co-movement, Financial Crisis, Stock Prices, Visibility Graph, Volatility

JEL Classification: C38, G01, G14, P43

Suggested Citation

Tan, Chong Hui and Ding, Ding, Volatilities and Correlations in the Stock Market During the Global Financial Crisis (August 19, 2015). 28th Australasian Finance and Banking Conference, Available at SSRN: https://ssrn.com/abstract=2647814 or http://dx.doi.org/10.2139/ssrn.2647814

Chong Hui Tan (Contact Author)

SIM University (UniSIM) ( email )

461 Clementi Road
Singapore, 599491
Singapore

Ding Ding

SIM University (UniSIM) ( email )

461 Clementi Road
Singapore, 599491
Singapore

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