Local normalization: Uncovering correlations in non-stationary financial time series |
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Authors: | Rudi Schäfer Thomas Guhr |
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Institution: | Fakultät für Physik, Universität Duisburg-Essen, Germany |
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Abstract: | The measurement of correlations between financial time series is of vital importance for risk management. In this paper we address an estimation error that stems from the non-stationarity of the time series. We put forward a method to rid the time series of local trends and variable volatility, while preserving cross-correlations. We test this method in a Monte Carlo simulation, and apply it to empirical data for the S&P 500 stocks. |
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Keywords: | Econophysics Financial correlations Non-stationarity Time series analysis |
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