IDEAS home Printed from https://ideas.repec.org/a/eee/phsmap/v368y2006i2p511-521.html
   My bibliography  Save this article

The reaction of stock markets to crashes and events: A comparison study between emerging and mature markets using wavelet transforms

Author

Listed:
  • Sharkasi, Adel
  • Crane, Martin
  • Ruskin, Heather J.
  • Matos, Jose A.

Abstract

We study here the behaviour of the first three eigenvalues (λ1,λ2,λ3) and their ratios [(λ1/λ2),(λ1/λ3),(λ2/λ3)] of the covariance matrices of the original return series and of those rebuilt from wavelet components for emerging and mature markets. It has been known for some time that the largest eigenvalue (λ1) contains information on the risk associated with the particular assets of which the covariance matrix is comprised. Here, we wish to ascertain whether the subdominant eigenvalues (λ2,λ3) hold information on the risk of the stock market and also to measure the recovery time for emerging and mature markets. To do this, we use the discrete wavelet transform which gives a clear picture of the movements in the return series by reconstructing them using each wavelet component. Our results appear to indicate that mature markets respond to crashes differently to emerging ones, in that emerging markets may take up to two months to recover while major markets take less than a month to do so. In addition, the results appears to show that the subdominant eigenvalues (λ2,λ3) give additional information on market movement, especially for emerging markets and that a study of the behaviour of the other eigenvalues may provide insight on crash dynamics.

Suggested Citation

  • Sharkasi, Adel & Crane, Martin & Ruskin, Heather J. & Matos, Jose A., 2006. "The reaction of stock markets to crashes and events: A comparison study between emerging and mature markets using wavelet transforms," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 368(2), pages 511-521.
    • Handle: RePEc:eee:phsmap:v:368:y:2006:i:2:p:511-521
    DOI: 10.1016/j.physa.2005.12.048
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S0378437106000173
    Download Restriction: Full text for ScienceDirect subscribers only. Journal offers the option of making the article available online on Science direct for a fee of $3,000
    File URL: https://libkey.io/10.1016/j.physa.2005.12.048?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Sandeep Patel & Asani Sarkar, 1998. "Stock market crises in developed and emerging markets," Research Paper 9809, Federal Reserve Bank of New York.
    2. Sharifi, S. & Crane, M. & Shamaie, A. & Ruskin, H., 2004. "Random matrix theory for portfolio optimization: a stability approach," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 335(3), pages 629-643.
    3. Di Matteo, T. & Aste, T. & Dacorogna, M.M., 2003. "Scaling behaviors in differently developed markets," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 324(1), pages 183-188.
    4. Plerou, V. & Gopikrishnan, P. & Rosenow, B. & Amaral, L.A.N. & Stanley, H.E., 2001. "Collective behavior of stock price movements—a random matrix theory approach," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 299(1), pages 175-180.
    5. Pafka, Szilárd & Kondor, Imre, 2003. "Noisy covariance matrices and portfolio optimization II," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 319(C), pages 487-494.
    6. Adel Sharkasi & Martin Crane & Heather J. Ruskin, 2006. "Apples and Oranges: the difference between the Reaction of the Emerging and Mature Markets to Crashes," Springer Books, in: Hideki Takayasu (ed.), Practical Fruits of Econophysics, pages 38-42, Springer.
    7. Philip D Wooldridge & Dietrich Domanski & Anna Cobau, 2003. "Changing links between mature and emerging financial markets," BIS Quarterly Review, Bank for International Settlements, September.
    8. Kwapień, J & Drożdż, S & Speth, J, 2004. "Time scales involved in emergent market coherence," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 337(1), pages 231-242.
    9. Vasiliki Plerou & Parameswaran Gopikrishnan & Bernd Rosenow & Luis A. Nunes Amaral & H. Eugene Stanley, 1999. "Universal and non-universal properties of cross-correlations in financial time series," Papers cond-mat/9902283, arXiv.org.
    10. Galluccio, Stefano & Bouchaud, Jean-Philippe & Potters, Marc, 1998. "Rational decisions, random matrices and spin glasses," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 259(3), pages 449-456.
    11. Salomons, Roelof & Grootveld, Henk, 2002. "The equity risk premium: emerging versus developed markets," Research Report 02E45, University of Groningen, Research Institute SOM (Systems, Organisations and Management).
    12. Matteo, T. Di & Aste, T. & Dacorogna, Michel M., 2005. "Long-term memories of developed and emerging markets: Using the scaling analysis to characterize their stage of development," Journal of Banking & Finance, Elsevier, vol. 29(4), pages 827-851, April.
    13. repec:dgr:rugsom:02e45 is not listed on IDEAS
    14. Ilhan Meric & Gulser Meric, 1997. "Co-Movements of European Equity Markets Before and After the 1987 Crash," Multinational Finance Journal, Multinational Finance Journal, vol. 1(2), pages 137-152, June.
    15. Wilcox, Diane & Gebbie, Tim, 2004. "On the analysis of cross-correlations in South African market data," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 344(1), pages 294-298.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Khalfaoui, Rabeh, 2018. "Oil–gold time varying nexus: A time–frequency analysis," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 503(C), pages 86-104.
    2. Matos, José A.O. & Gama, Sílvio M.A. & Ruskin, Heather J. & Sharkasi, Adel Al & Crane, Martin, 2008. "Time and scale Hurst exponent analysis for financial markets," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 387(15), pages 3910-3915.
    3. Jammazi, Rania, 2012. "Cross dynamics of oil-stock interactions: A redundant wavelet analysis," Energy, Elsevier, vol. 44(1), pages 750-777.
    4. Conlon, T. & Ruskin, H.J. & Crane, M., 2007. "Random matrix theory and fund of funds portfolio optimisation," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 382(2), pages 565-576.
    5. Jiawen Xu & Yixuan Li & Kai Liu & Tao Chen, 2023. "Portfolio selection: from under-diversification to concentration," Empirical Economics, Springer, vol. 64(4), pages 1539-1557, April.
    6. Rahul Deora & Duc Khuong Nguyen, 2014. "Time-scale comovement between the Indian and world stock markets," Working Papers 2014-242, Department of Research, Ipag Business School.
    7. Kaijian He & Kin Keung Lai & Guocheng Xiang, 2012. "Portfolio Value at Risk Estimate for Crude Oil Markets: A Multivariate Wavelet Denoising Approach," Energies, MDPI, vol. 5(4), pages 1-26, April.
    8. Zhou, Zhongbao & Lin, Ling & Li, Shuxian, 2018. "International stock market contagion: A CEEMDAN wavelet analysis," Economic Modelling, Elsevier, vol. 72(C), pages 333-352.
    9. Chakrabarty, Anindya & De, Anupam & Gunasekaran, Angappa & Dubey, Rameshwar, 2015. "Investment horizon heterogeneity and wavelet: Overview and further research directions," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 429(C), pages 45-61.
    10. Khalfaoui Rabeh, K & Boutahar Mohamed, B, 2011. "A time-scale analysis of systematic risk: wavelet-based approach," MPRA Paper 31938, University Library of Munich, Germany.
    11. Aloui, Chaker & Hkiri, Besma, 2014. "Co-movements of GCC emerging stock markets: New evidence from wavelet coherence analysis," Economic Modelling, Elsevier, vol. 36(C), pages 421-431.
    12. Quinton Morris & Gary Van Vuuren & Paul Styger, 2009. "Further Evidence Of Long Memory In The South African Stock Market," South African Journal of Economics, Economic Society of South Africa, vol. 77(1), pages 81-101, March.
    13. Hamza Almustafa, 2022. "National Governance Quality, COVID-19, and Stock Index Returns: OECD Evidence," Economies, MDPI, vol. 10(9), pages 1-16, September.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Marcin Wk{a}torek & Stanis{l}aw Dro.zd.z & Jaros{l}aw Kwapie'n & Ludovico Minati & Pawe{l} O'swik{e}cimka & Marek Stanuszek, 2020. "Multiscale characteristics of the emerging global cryptocurrency market," Papers 2010.15403, arXiv.org, revised Mar 2021.
    2. Leonidas Sandoval Junior & Italo De Paula Franca, 2011. "Correlation of financial markets in times of crisis," Papers 1102.1339, arXiv.org, revised Mar 2011.
    3. Sandoval, Leonidas & Franca, Italo De Paula, 2012. "Correlation of financial markets in times of crisis," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 391(1), pages 187-208.
    4. Conlon, T. & Ruskin, H.J. & Crane, M., 2007. "Random matrix theory and fund of funds portfolio optimisation," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 382(2), pages 565-576.
    5. Cristescu, Constantin P. & Stan, Cristina & Scarlat, Eugen I. & Minea, Teofil & Cristescu, Cristina M., 2012. "Parameter motivated mutual correlation analysis: Application to the study of currency exchange rates based on intermittency parameter and Hurst exponent," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 391(8), pages 2623-2635.
    6. Daly, J. & Crane, M. & Ruskin, H.J., 2008. "Random matrix theory filters in portfolio optimisation: A stability and risk assessment," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 387(16), pages 4248-4260.
    7. Conlon, T. & Ruskin, H.J. & Crane, M., 2009. "Cross-correlation dynamics in financial time series," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 388(5), pages 705-714.
    8. Eterovic, Nicolas A. & Eterovic, Dalibor S., 2013. "Separating the wheat from the chaff: Understanding portfolio returns in an emerging market," Emerging Markets Review, Elsevier, vol. 16(C), pages 145-169.
    9. Wilcox, Diane & Gebbie, Tim, 2007. "An analysis of cross-correlations in an emerging market," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 375(2), pages 584-598.
    10. Yin, Yi & Shang, Pengjian, 2013. "Modified DFA and DCCA approach for quantifying the multiscale correlation structure of financial markets," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 392(24), pages 6442-6457.
    11. Matthieu Garcin, 2021. "Forecasting with fractional Brownian motion: a financial perspective," Papers 2105.09140, arXiv.org, revised Sep 2021.
    12. Pafka, Szilárd & Kondor, Imre, 2001. "Evaluating the RiskMetrics methodology in measuring volatility and Value-at-Risk in financial markets," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 299(1), pages 305-310.
    13. Stosic, Darko & Stosic, Dusan & Ludermir, Teresa B. & Stosic, Tatijana, 2018. "Collective behavior of cryptocurrency price changes," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 507(C), pages 499-509.
    14. Sensoy, Ahmet & Tabak, Benjamin M., 2016. "Dynamic efficiency of stock markets and exchange rates," International Review of Financial Analysis, Elsevier, vol. 47(C), pages 353-371.
    15. Duc Thi Luu, 2022. "Portfolio Correlations in the Bank-Firm Credit Market of Japan," Computational Economics, Springer;Society for Computational Economics, vol. 60(2), pages 529-569, August.
    16. Ma, Pengcheng & Li, Daye & Li, Shuo, 2016. "Efficiency and cross-correlation in equity market during global financial crisis: Evidence from China," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 444(C), pages 163-176.
    17. Zhang, Jiu & Jin, Li-Fu & Zheng, Bo & Li, Yan & Jiang, Xiong-Fei, 2022. "Simplified calculations of time correlation functions in non-stationary complex financial systems," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 589(C).
    18. Ashok Chanabasangouda Patil & Shailesh Rastogi, 2020. "Multifractal Analysis of Market Efficiency across Structural Breaks: Implications for the Adaptive Market Hypothesis," JRFM, MDPI, vol. 13(10), pages 1-18, October.
    19. Istvan Varga-Haszonits & Fabio Caccioli & Imre Kondor, 2016. "Replica approach to mean-variance portfolio optimization," Papers 1606.08679, arXiv.org.
    20. A. Gómez-Águila & J. E. Trinidad-Segovia & M. A. Sánchez-Granero, 2022. "Improvement in Hurst exponent estimation and its application to financial markets," Financial Innovation, Springer;Southwestern University of Finance and Economics, vol. 8(1), pages 1-21, December.

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:phsmap:v:368:y:2006:i:2:p:511-521. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Liu (email available below). General contact details of provider: http://www.journals.elsevier.com/physica-a-statistical-mechpplications/ .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.