Time dependent cross correlations between different stock returns: A directed network of influence

TL;DR

This paper investigates how stock returns influence each other over time by analyzing tick-by-tick data, revealing a weak but significant directional influence network that aligns with market efficiency.

Contribution

It introduces a method to measure time-dependent cross correlations of stock returns and constructs a directed influence network based on these correlations.

Findings

Maximum correlations often occur at nonzero time shifts.

The influence effects are weak but statistically significant.

Characteristic influence times are on the order of a few minutes.

Abstract

We study the time dependent cross correlations of stock returns, i.e. we measure the correlation as the function of the time shift between pairs of stock return time series using tick-by-tick data. We find a weak but significant effect showing that in many cases the maximum correlation is at nonzero time shift indicating directions of influence between the companies. Due to the weakness of the effect and the shortness of the characteristic time (in the order of a few minutes) the effect is compatible with market efficiency. The interaction of companies defines a directed network of influence.