Correlation and volatility in an Indian stock market: A random matrix approach |
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Authors: | Varsha Kulkarni Nivedita Deo |
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Institution: | (1) Department of Physics and Astrophysics, University of Delhi, Delhi, 110007, India;(2) Department of Statistics, University of Wisconsin-Madison, Medical Science Center, 1300 University Avenue, Madison, WI 53706, USA |
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Abstract: | We examine the volatility of an Indian stock market in terms of
correlation of stocks and quantify the volatility using the random
matrix approach. First we discuss trends observed in the pattern
of stock prices in the Bombay Stock Exchange for the three-year
period 2000–2002. Random matrix analysis is then applied to study
the relationship between the coupling of stocks and volatility.
The study uses daily returns of 70 stocks for successive time
windows of length 85 days for the year 2001. We compare the
properties of matrix C of correlations between price
fluctuations in time regimes characterized by different
volatilities. Our analyses reveal that (i) the largest (deviating)
eigenvalue of C correlates highly with the volatility of the
index, (ii) there is a shift in the distribution of the components
of the eigenvector corresponding to the largest eigenvalue across
regimes of different volatilities, (iii) the inverse participation
ratio for this eigenvector anti-correlates significantly with the
market fluctuations and finally, (iv) this eigenvector of C can
be used to set up a Correlation Index, CI whose temporal
evolution is significantly correlated with the volatility of the
overall market index. |
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Keywords: | 89 65 Gh Economics econophysics financial markets business and management 89 65 -s Social and economic systems 89 75 -k Complex systems |
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