The Spread of the Credit Crisis: View from a Stock Correlation Network

Smith, Reginald (2008): The Spread of the Credit Crisis: View from a Stock Correlation Network. Forthcoming in: Journal of the Korean Physical Society , Vol. 54, No. 6 (15 June 2009)

Abstract

The credit crisis roiling the world's financial markets will likely take years and entire careers to fully understand and analyze. A short empirical investigation of the current trends, however, demonstrates that the losses in certain markets, in this case the US equity markets, follow a cascade or epidemic flow like model along the correlations of various stocks. A few images and explanation here will suffice to show the phenomenon. Also, whether the idea of "epidemic" or a "cascade" is a metaphor or model for this crisis will be discussed.

Animations of the spread of the crisis are available at http://reggiesmithsci.googlepages.com/creditcrisis

• Item Type: MPRA Paper
• Language: English
• Keywords: networks, econophysics, equities, stock market, correlation, credit crisis
• Subjects: G - Financial Economics > G1 - General Financial Markets > G15 - International Financial Markets; G - Financial Economics > G1 - General Financial Markets > G10 - General

References

JC Gower, “Some distance properties of latent root and vector methods used in multivariate analysis”, Biometrika, 53, 325 (1966).

RC Mantegna, “Hierarchical structure in financial markets”, Eur. Phys. J. B, 11, 193 (1999).

RN Mantegna & HE Stanley, An Introduction to Econophysics: Correlations and Complexity in Finance, Cambridge: Cambridge University Press, (1999).

J Cox, “Credit Crisis Timeline”, The University of Iowa Center International Finance and Development, retrieved October 17, 2008 (2008).

TG Andersen, T Bollerslev, FX Diebold, & H Ebens, “The distribution of realized stock return volatility”, J. of Financial Economics, 61, 43 (2001).

F Black, “Studies of stock market volatility changes”, Proceedings of the American Statistical Association, Business and Economic Statistics Section, 177 (1976).

JY Campbell & L Hentschel, “No news is good news: an asymmetric model of changing volatility in stock returns”, J. of Financial Economics, 31, 281 (1992).