Phase separation and scaling in correlation structures of financial markets

Chakraborti, Anirban, Hrishidev, Hrishidev, Sharma, Kiran and Pharasi, Hirdesh K (2021) Phase separation and scaling in correlation structures of financial markets. Journal of Physics: Complexity, 2 (1): 015002. ISSN 2632072X

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Financial markets, being spectacular examples of complex systems, display rich correlation structures among price returns of different assets. The correlation structures change drastically, akin to critical phenomena in physics, as do the influential stocks (leaders) and sectors (communities), during market events like crashes. It is crucial to detect their signatures for timely intervention or prevention. Here we use eigenvalue decomposition and eigen-entropy, computed from eigenvector centralities of different stocks in the cross-correlation matrix, to extract information about the disorder in the market. We construct a ‘phase space’, where different market events (bubbles, crashes, etc) undergo phase separation and display order–disorder movements. An entropy functional exhibits scaling behavior. We propose a generic indicator that facilitates the continuous monitoring of the internal structure of the market important for managing risk and stress-testing the financial system. Our methodology would help in understanding and foreseeing tipping points or fluctuation patterns in complex systems.

Item Type: Article
Keywords: Complex systems | Bubbles and Crashes | Market Correlations | Eigenvector Centrality | Entropy | Phase Separation| Order–Disordertransition
Subjects: Social Sciences and humanities > Economics, Econometrics and Finance > Banking and Finance
Physical, Life and Health Sciences > Physics and Astronomy
JGU School/Centre: Jindal School of Government and Public Policy
Depositing User: Amees Mohammad
Date Deposited: 30 Nov 2021 09:33
Last Modified: 08 Jan 2022 18:42
Official URL:
Additional Information: The authors are grateful to A S Chakrabarti, J Kertész, F Leyvraz, M S Santhanam, and T H Seligman for their critical inputs and suggestions. HKP is grateful for financial support provided by UNAM-DGAPA and CONACYT Proyecto Fronteras 952. AC and KS acknowledge support from the Project UNAM-DGAPA-PAPIIT AG 100819 and CONACyT Project FRONTERAS 201


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