Correlation Analysis

A Stochastic Model for Illiquid Stock Prices and its Conclusion about Correlation Measurement ArXiv ID: 2509.10553 “View on arXiv” Authors: Erina Nanyonga, Juma Kasozi, Fred Mayambala, Hassan W. Kayondo, Matt Davison Abstract This study explores the behavioral dynamics of illiquid stock prices in a listed stock market. Illiquidity, characterized by wide bid and ask spreads affects price formation by decoupling prices from standard risk and return relationships and increasing sensitivity to market sentiment. We model the prices at the Uganda Securities Exchange (USE) which is illiquid in that the prices remain constant much of the time thus complicating price modelling. We circumvent this challenge by combining the Markov model (MM) with two models; the exponential Ornstein Uhlenbeck model (XOU) and geometric Brownian motion (gBm). In the combined models, the MM was used to capture the constant prices in the stock prices while the XOU and gBm captured the stochastic price dynamics. We modelled stock prices using the combined models, as well as XOU and gBm alone. We found that USE stocks appeared to have low correlation with one another. Using theoretical analysis, simulation study and empirical analysis, we conclude that this apparent low correlation is due to illiquidity. In particular data simulated from combined MM-gBm, in which the gBm portion were highly correlated resulted in a low measured correlation when the Markov chain had a higher transition from zero state to zero state. ...

Anti-correlation network among China A-shares ArXiv ID: 2404.00028 “View on arXiv” Authors: Unknown Abstract The correlation-based financial networks are studied intensively. However, previous studies ignored the importance of the anti-correlation. This paper is the first to consider the anti-correlation and positive correlation separately, and accordingly construct the weighted temporal anti-correlation and positive correlation networks among stocks listed in the Shanghai and Shenzhen stock exchanges. For both types of networks during the first 24 years of this century, fundamental topological measurements are analyzed systematically. This paper unveils some essential differences in these topological measurements between the anti-correlation and positive correlation networks. It also observes an asymmetry effect between the stock market decline and rise. The methodology proposed in this paper has the potential to reveal significant differences in the topological structure and dynamics of a complex financial system, stock behavior, investment portfolios, and risk management, offering insights that are not visible when all correlations are considered together. More importantly, this paper proposes a new direction for studying complex systems: the anti-correlation network. It is well worth reexamining previous relevant studies using this new methodology. ...

Copula-based deviation measure of cointegrated financial assets ArXiv ID: 2312.02081 “View on arXiv” Authors: Unknown Abstract This study outlines a comprehensive methodology utilizing copulas to discern inconsistencies in the behavior exhibited by pairs of financial assets. It introduces a robust approach to establishing the interrelationship between the returns of these assets, exploring potential measures of dependence among the stochastic variables represented by these returns. Special emphasis is placed on scrutinizing the traditional measure of dependence, namely the correlation coefficient, delineating its limitations. Furthermore, the study articulates an alternative methodology that offers enhanced stability and informativeness in appraising the relationship between financial instrument returns. ...