A spectral perspective on excess volatility





Professorship/Faculty: International Economics  
Author(s): Milaković, Mishael; Alfarano, Simone; Livan, Giacomo; Scalas, Enrico
Title of the Journal: Applied Economics Letters
Publisher Information: Abingdon : Routledge, Taylor & Francis
Year of publication: 2014
Volume: 21
Issue: Published online: 04 Nov 2014
Pages: 745-750 ; Online-Ressource
Language(s): English
DOI: 10.1080/13504851.2014.975324
Abstract: 
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.
Keywords: excess volatility, excess comovement, random matrix theory, profit rate, return on assets
Document Type: Article
URI: https://fis.uni-bamberg.de/handle/uniba/21070
Year of publication: 19. November 2014