Limits...
Evolvement of uniformity and volatility in the stressed global financial village.

Kenett DY, Raddant M, Lux T, Ben-Jacob E - PLoS ONE (2012)

Bottom Line: The Japanese market switches "identity"--it switches between periods of high meta-correlations with the "western" markets and periods when it behaves more similarly to the "eastern" markets.Such changes can be used as precursors to the agitation of the global financial village.Hence, the new approach can help to develop a sensitive "financial seismograph" to detect early signs of global financial crises so they can be treated before they develop into worldwide events.

View Article: PubMed Central - PubMed

Affiliation: School of Physics and Astronomy, Tel-Aviv University, Tel-Aviv, Israel.

ABSTRACT

Background: In the current era of strong worldwide market couplings the global financial village became highly prone to systemic collapses, events that can rapidly sweep throughout the entire village.

Methodology/principal findings: We present a new methodology to assess and quantify inter-market relations. The approach is based on the correlations between the market index, the index volatility, the market Index Cohesive Force and the meta-correlations (correlations between the intra-correlations.) We investigated the relations between six important world markets--U.S., U.K., Germany, Japan, China and India--from January 2000 until December 2010. We found that while the developed "western" markets (U.S., U.K., Germany) are highly correlated, the interdependencies between these markets and the developing "eastern" markets (India and China) are volatile and with noticeable maxima at times of global world events. The Japanese market switches "identity"--it switches between periods of high meta-correlations with the "western" markets and periods when it behaves more similarly to the "eastern" markets.

Conclusions/significance: The methodological framework presented here provides a way to quantify the evolvement of interdependencies in the global market, evaluate a world financial network and quantify changes in the world inter market relations. Such changes can be used as precursors to the agitation of the global financial village. Hence, the new approach can help to develop a sensitive "financial seismograph" to detect early signs of global financial crises so they can be treated before they develop into worldwide events.

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Related in: MedlinePlus

Relative volatility in the markets within a 22-day window.The price indices data was standardized for the 10-year interval (the mean is zero and the variance is 1 for each complete time series). The volatility peaks for the U.S, U.K. and Germany mostly coincide while there is less similarity with Japan. India and China show a very different behavior of volatility, especially until 2007.
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pone-0031144-g002: Relative volatility in the markets within a 22-day window.The price indices data was standardized for the 10-year interval (the mean is zero and the variance is 1 for each complete time series). The volatility peaks for the U.S, U.K. and Germany mostly coincide while there is less similarity with Japan. India and China show a very different behavior of volatility, especially until 2007.

Mentions: Investigating the index volatility, rather than the index price reveals meaningful hidden information. Studying Figure 2, a similarity is observed between the three “western” markets, while the volatility peaks of the “eastern” markets only coincide for some time periods. Thus, it is reasonable to ask whether such uniformity between some markets, and multiformity between others, can be quantified.


Evolvement of uniformity and volatility in the stressed global financial village.

Kenett DY, Raddant M, Lux T, Ben-Jacob E - PLoS ONE (2012)

Relative volatility in the markets within a 22-day window.The price indices data was standardized for the 10-year interval (the mean is zero and the variance is 1 for each complete time series). The volatility peaks for the U.S, U.K. and Germany mostly coincide while there is less similarity with Japan. India and China show a very different behavior of volatility, especially until 2007.
© Copyright Policy
Related In: Results  -  Collection

Show All Figures
getmorefigures.php?uid=PMC3275621&req=5

pone-0031144-g002: Relative volatility in the markets within a 22-day window.The price indices data was standardized for the 10-year interval (the mean is zero and the variance is 1 for each complete time series). The volatility peaks for the U.S, U.K. and Germany mostly coincide while there is less similarity with Japan. India and China show a very different behavior of volatility, especially until 2007.
Mentions: Investigating the index volatility, rather than the index price reveals meaningful hidden information. Studying Figure 2, a similarity is observed between the three “western” markets, while the volatility peaks of the “eastern” markets only coincide for some time periods. Thus, it is reasonable to ask whether such uniformity between some markets, and multiformity between others, can be quantified.

Bottom Line: The Japanese market switches "identity"--it switches between periods of high meta-correlations with the "western" markets and periods when it behaves more similarly to the "eastern" markets.Such changes can be used as precursors to the agitation of the global financial village.Hence, the new approach can help to develop a sensitive "financial seismograph" to detect early signs of global financial crises so they can be treated before they develop into worldwide events.

View Article: PubMed Central - PubMed

Affiliation: School of Physics and Astronomy, Tel-Aviv University, Tel-Aviv, Israel.

ABSTRACT

Background: In the current era of strong worldwide market couplings the global financial village became highly prone to systemic collapses, events that can rapidly sweep throughout the entire village.

Methodology/principal findings: We present a new methodology to assess and quantify inter-market relations. The approach is based on the correlations between the market index, the index volatility, the market Index Cohesive Force and the meta-correlations (correlations between the intra-correlations.) We investigated the relations between six important world markets--U.S., U.K., Germany, Japan, China and India--from January 2000 until December 2010. We found that while the developed "western" markets (U.S., U.K., Germany) are highly correlated, the interdependencies between these markets and the developing "eastern" markets (India and China) are volatile and with noticeable maxima at times of global world events. The Japanese market switches "identity"--it switches between periods of high meta-correlations with the "western" markets and periods when it behaves more similarly to the "eastern" markets.

Conclusions/significance: The methodological framework presented here provides a way to quantify the evolvement of interdependencies in the global market, evaluate a world financial network and quantify changes in the world inter market relations. Such changes can be used as precursors to the agitation of the global financial village. Hence, the new approach can help to develop a sensitive "financial seismograph" to detect early signs of global financial crises so they can be treated before they develop into worldwide events.

Show MeSH
Related in: MedlinePlus