Evolution of worldwide stock markets, correlation structure and correlation based graphs

TL;DR

This paper analyzes the evolution of global stock market correlations from 1996 to 2009, revealing fast and slow dynamics linked to critical events and globalization, using correlation matrices and network measures.

Contribution

It introduces a measure of mutual information based on network link co-occurrence to quantify fast correlation dynamics among global stock indices.

Findings

Correlation dynamics occur on fast (<3 months) and slow timescales.

Spectral properties of correlation matrices reflect market dynamics.

Mutual information based on network links detects rapid changes.

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.