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

The global financial village for the years 2000 (left) and 2010 (right).The width of the edges of the graph is proportional to the meta-correlation between the markets it connects (right legend). The node size is proportional to the inter-correlations (left legend). For 2000 we observe markets with low intra-correlations and inter-correlations of similar magnitude, excluding China. For 2010 we observe much higher intra-correlations in all markets and a denser network of interdependencies. (The nodes for the U.K. and Germany are further away from each other than their geographical position).
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pone-0031144-g006: The global financial village for the years 2000 (left) and 2010 (right).The width of the edges of the graph is proportional to the meta-correlation between the markets it connects (right legend). The node size is proportional to the inter-correlations (left legend). For 2000 we observe markets with low intra-correlations and inter-correlations of similar magnitude, excluding China. For 2010 we observe much higher intra-correlations in all markets and a denser network of interdependencies. (The nodes for the U.K. and Germany are further away from each other than their geographical position).

Mentions: The coupling of markets, as quantified by the meta-correlation, changes over time. The Japanese market switches between following the “western” and following the “eastern” worlds: for some time intervals it behaves very similar to the U.S. market (which is also similar to the U.K. and Germany markets), and at other times, the intra-correlations of Japan behave more similar to that of the Asian countries. Similar observations can be made for U.K. and Germany and their similarity to the U.S. vs. Asia. The interdependencies between India and China and the more developed markets are very volatile over time and show maxima in years with important global events (2001: 9/11-attacks, 2003: Iraq war, SARS, etc.). To illustrate the general development, we show the differences in coupling between markets during 2001 and 2010 (see Figure 6). The line strength is proportional to the level of the meta-correlations. The world's financial markets show a higher uniformity in the later years of our analysis. A video visualizing the development of market interdependencies is available as part of the Supplementary Information: http://dl.dropbox.com/u/16978699/globalmarket.mp4


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

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

The global financial village for the years 2000 (left) and 2010 (right).The width of the edges of the graph is proportional to the meta-correlation between the markets it connects (right legend). The node size is proportional to the inter-correlations (left legend). For 2000 we observe markets with low intra-correlations and inter-correlations of similar magnitude, excluding China. For 2010 we observe much higher intra-correlations in all markets and a denser network of interdependencies. (The nodes for the U.K. and Germany are further away from each other than their geographical position).
© Copyright Policy
Related In: Results  -  Collection

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

pone-0031144-g006: The global financial village for the years 2000 (left) and 2010 (right).The width of the edges of the graph is proportional to the meta-correlation between the markets it connects (right legend). The node size is proportional to the inter-correlations (left legend). For 2000 we observe markets with low intra-correlations and inter-correlations of similar magnitude, excluding China. For 2010 we observe much higher intra-correlations in all markets and a denser network of interdependencies. (The nodes for the U.K. and Germany are further away from each other than their geographical position).
Mentions: The coupling of markets, as quantified by the meta-correlation, changes over time. The Japanese market switches between following the “western” and following the “eastern” worlds: for some time intervals it behaves very similar to the U.S. market (which is also similar to the U.K. and Germany markets), and at other times, the intra-correlations of Japan behave more similar to that of the Asian countries. Similar observations can be made for U.K. and Germany and their similarity to the U.S. vs. Asia. The interdependencies between India and China and the more developed markets are very volatile over time and show maxima in years with important global events (2001: 9/11-attacks, 2003: Iraq war, SARS, etc.). To illustrate the general development, we show the differences in coupling between markets during 2001 and 2010 (see Figure 6). The line strength is proportional to the level of the meta-correlations. The world's financial markets show a higher uniformity in the later years of our analysis. A video visualizing the development of market interdependencies is available as part of the Supplementary Information: http://dl.dropbox.com/u/16978699/globalmarket.mp4

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