Persistent collective trend in stock markets

TL;DR

This paper provides empirical evidence that stock prices are more correlated during falling markets than rising ones, indicating a collective fear factor among investors.

Contribution

It demonstrates a significant difference in collective stock trend correlations during market declines versus rises using extensive historical data.

Findings

Higher correlations during falling markets

Statistically significant difference in stock behavior

Evidence of a collective fear factor

Abstract

Empirical evidence is given for a significant difference in the collective trend of the share prices during the stock index rising and falling periods. Data on the Dow Jones Industrial Average and its stock components are studied between 1991 and 2008. Pearson-type correlations are computed between the stocks and averaged over stock-pairs and time. The results indicate a general trend: whenever the stock index is falling the stock prices are changing in a more correlated manner than in case the stock index is ascending. A thorough statistical analysis of the data shows that the observed difference is significant, suggesting a constant-fear factor among stockholders.