Emergence of correlations between securities at short time scales

Abstract

The correlation matrix is the key element in optimal portfolio allocation and risk management. In particular, the eigenvectors of the correlation matrix corresponding to large eigenvalues can be used to identify the market mode, sectors and style factors. We investigate how these eigenvalues depend on the time scale of securities returns in the U.S. market. For this purpose, oneminute returns of the largest 533 U.S. stocks are aggregated at different time scales and used to estimate the correlation matrix and its spectral properties. We propose a simple lead-lag factor model to capture and reproduce the observed time-scale dependence of eigenvalues. We reveal the emergence of several dominant eigenvalues as the time scale increases. This important finding evidences that the underlying economic and financial mechanisms determining the correlation structure of securities depend as well on time scales.

Lead–lag relationships in foreign exchange markets

“…Research on these lead-lag relationships predominantly focuses on correlation analyses of dynamics of stock prices or market indexes [9][10][11]. To the best of our knowledge, the examination of the lead-lag relationships in a foreign exchange market remains largely unexplored.…”