A New Look on Financial Markets Co-Movement through Cooperative Dynamics in Many-Body Physics
Abstract
:1. Introduction
- is the return on the asset i,
- is the part of the return on the asset i that is due to aspects of the asset itself, such as profit, business, etc.
- is the return of the risk-free asset,
- is the market return (usually proxied through its main equity index or an all-shares value-weighted portfolio),
- is known as the market risk premium, and
- is a zero-mean residual.
2. Methodology
- . Consider the functionsThe function is a measure of co-movement, from time t to time , along the time t and the function is a measure of co-movement for the full period considered.The interpretation of these functions is as follows: if the resulting function is close to 1, it means that there is no co-movement in the whole market; if it yields values lower than 1, then we can say that the stocks move together; and if, on the contrary, the values are greater than 1, the stocks tend to move in the opposite direction.
- . Consider the functionsIn this case, if the functions are close to 0 it means that there is no co-movement; if they are greater than 0, it means that the stocks move in the same direction and, when they are less than 0, the stocks move in the opposite direction.
- . Consider the functionsThese functions are interpreted in the same way that . Note that and take values between and 1.
3. Results
3.1. Co-Movement for Different Lag Times with and without Considering the Market
3.2. Co-Movement along the Time
3.3. Other Ways to Represent the Market
- ew: equal weight. This is the representation described in the previous section, which is, , where is the number of stocks at time t.
- cap: this representation is calculated as a capitalization-weighted average, which is, and with the capitalization of asset j.
- SPY: the SP500 index.
- IWM: the Russell 2000 index.
Considering Beta
4. Conclusions
Author Contributions
Funding
Conflicts of Interest
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López-García, M.N.; Sánchez-Granero, M.A.; Trinidad-Segovia, J.E.; Puertas, A.M.; Nieves, F.J.D.l. A New Look on Financial Markets Co-Movement through Cooperative Dynamics in Many-Body Physics. Entropy 2020, 22, 954. https://doi.org/10.3390/e22090954
López-García MN, Sánchez-Granero MA, Trinidad-Segovia JE, Puertas AM, Nieves FJDl. A New Look on Financial Markets Co-Movement through Cooperative Dynamics in Many-Body Physics. Entropy. 2020; 22(9):954. https://doi.org/10.3390/e22090954
Chicago/Turabian StyleLópez-García, María Nieves, Miguel Angel Sánchez-Granero, Juan Evangelista Trinidad-Segovia, Antonio Manuel Puertas, and Francisco Javier De las Nieves. 2020. "A New Look on Financial Markets Co-Movement through Cooperative Dynamics in Many-Body Physics" Entropy 22, no. 9: 954. https://doi.org/10.3390/e22090954