Life time of correlation between stocks prices on established and emerging markets

TL;DR

This paper investigates the duration of stock price correlations in established and emerging markets, introducing the concept of 'Life Time of Correlation' to optimize the analysis window for risk and portfolio management.

Contribution

It introduces the 'Life Time of Correlation' metric and compares correlation dynamics across emerging and established markets using various analytical methods.

Findings

Correlation durations differ between emerging and established markets.

The 'Life Time of Correlation' helps determine optimal analysis periods.

Multiple methods, including Minimum Spanning Trees, are discussed for correlation analysis.

Abstract

The correlation coefficient between stocks depends on price history and includes information on hierarchical structure in financial markets. It is useful for portfolio selection and estimation of risk. I introduce the Life Time of Correlation between stocks prices to know how far we should investigate the price history to obtain the optimal durability of correlation. I carry out my research on emerging (Poland) and established markets (in the USA, Great Britain and Germany). Other methods, including the Minimum Spanning Trees, tree half-life, decomposition of correlations and the Epps effect are also discussed.