Cross-correlations in Warsaw Stock Exchange

TL;DR

This paper analyzes inter-stock correlations in the Warsaw Stock Exchange, revealing a one-factor model, increasing correlations with time scale, and dependence on market capitalization, indicating a transitional market phase.

Contribution

It demonstrates that the Polish stock market's correlation structure can be modeled by a single factor and highlights the dependence of correlations on time scale and capitalization.

Findings

Correlations increase with return time scale, saturating around 200 minutes.

Market capitalization influences correlation strength.

Polish market exhibits features between emerging and mature markets.

Abstract

We study the inter-stock correlations for the largest companies listed on Warsaw Stock Exchange and included in the WIG20 index. Our results from the correlation matrix analysis indicate that the Polish stock market can be well described by a one factor model. We also show that the stock-stock correlations tend to increase with the time scale of returns and they approach a saturation level for the time scales of at least 200 min, i.e. an order of magnitude longer than in the case of some developed markets. We also show that the strength of correlations among the stocks crucially depends on their capitalization. These results combined with our earlier findings together suggest that now the Polish stock market situates itself somewhere between an emerging market phase and a mature market phase.