Cross-correlation in financial dynamics

TL;DR

This paper examines the structure of stock interactions across Chinese, American, and Indian markets, revealing stronger correlations in China and unique sector interactions, supported by a simulation model.

Contribution

It provides a comparative analysis of cross-correlation structures in different markets and introduces a variation of a two-factor model to simulate these interactions.

Findings

Chinese market shows stronger correlations than developed markets.

Weak sector interactions in Chinese stocks, with notable interactions in unusual sectors.

Simulation using a modified two-factor model replicates observed interactions.

Abstract

To investigate the universal structure of interactions in financial dynamics, we analyze the cross-correlation matrix C of price returns of the Chinese stock market, in comparison with those of the American and Indian stock markets. As an important emerging market, the Chinese market exhibits much stronger correlations than the developed markets. In the Chinese market, the interactions between the stocks in a same business sector are weak, while extra interactions in unusual sectors are detected. Using a variation of the two-factor model, we simulate the interactions in financial markets.