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A spectral perspective on excess volatility

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journal contribution
posted on 2023-06-08, 19:09 authored by Giacomo Livan, Simone Alfarano, Mishael Milakovic, Enrico Scalas
We perform a careful spectral analysis of the correlation structures observed in real and financial returns for a large pool of long-lived US corporations and find that financial returns are characterized by strong collective fluctuations that are absent from real returns. Once the excessive comovement is subtracted from individual financial time series, the behaviour of real and financial returns is virtually identical in both the cross-sectional and time series domains, thereby demonstrating the inherently collective nature of excessive fluctuations. Put differently, if excess volatility is to be reduced, then one would do well to inhibit excess comovement first. At any rate, the excessive behaviour in volatility and comovement should no longer be studied in isolation of each other.

History

Publication status

  • Published

File Version

  • Submitted version

Journal

Applied Economics Letters

ISSN

1350-4851

Publisher

Taylor & Francis

Issue

90

Volume

22

Page range

745-750

Department affiliated with

  • Mathematics Publications

Full text available

  • Yes

Peer reviewed?

  • Yes

Legacy Posted Date

2014-11-24

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