Emerging interdependence between stock values during financial crashes

TL;DR

This paper investigates how stock interdependencies intensify during financial crashes, revealing prolonged periods of strong influence among stocks, akin to critical phenomena in physical systems.

Contribution

It introduces an information-theoretic approach to detect and analyze emerging interdependencies between stocks during crises, highlighting long-lasting effects of crashes.

Findings

Increased information flow during crises indicates stronger interdependence.

Stock interdependence persists for extended periods after crashes.

Behavior resembles critical phenomena in complex systems.

Abstract

To identify emerging interdependencies between traded stocks we investigate the behavior of the stocks of FTSE 100 companies in the period 2000-2015, by looking at daily stock values. Exploiting the power of information theoretical measures to extract direct influences between multiple time series, we compute the information flow across stock values to identify several different regimes. While small information flows is detected in most of the period, a dramatically different situation occurs in the proximity of global financial crises, where stock values exhibit strong and substantial interdependence for a prolonged period. This behavior is consistent with what one would generally expect from a complex system near criticality in physical systems, showing the long lasting effects of crashes on stock markets.