Adaptive approach to the analysis of correlation

properties of financial time series

Zhukova G. S. Kagirova D. R.
Financial University under the Government Moscow Polytechnic University
of the Russian Federation Russia, Moscow
Russia, Moscow da_dinara@mail.ru
galsevzhukova@mail.ru

Abstract—The analysis of the interrelation of non- where

stationary time series is performed using adaptive
correlation coefficients, which allowed characterizing the
specificity and dynamics of the observed financial
processes more accurately. A neural network model is
constructed to predict the motion of the series. A new
hybrid model is proposed for predicting structural shifts.
Keywords—nonstationary time series; modified
correlation coefficient; adaptive correlation coefficient;
correlation coefficient; world stock indices; forecasting;
ARIMA; neural network
I. INTRODUCTION
Modeling the relationship between world stock indexes
and subsequent forecasting is a fairly popular investment
strategy for financial market participants. The stock index
reflects the investment potential of each country, includes the
indicators of the largest companies in the main sectors of the
economy. The US exchange market is characterized, for
example, by the indices Nasdaq, S&P-500, Dow Jones
Industrial Average; the Russian stock market - the RTS and
MICEX indices. Analysis of the interrelations of stock indices
can be useful, for example, for portfolio managers in
diversifying their portfolio and minimizing risk.
II. NON-TRADITIONAL CORRELATION ANALYSIS
To analyze the correlation of pairs of time series, we use
the statistical database [1] on quotations of popular world
stock indices (S&P 500, Nikkei 225, DAX, FTSE 100, CAC
40, RTSI, SSEC). The length of each time series is assumed to
be equal to 4533th daily observations for the period from
January 1, 2000 to January 1, 2017.
We calculate the following coefficients [2-3]:
1) the traditional correlation coefficient, calculated
recursively with a step equal to one:
σ(௫ି௫ҧ )(௬ି௬ത)
‫=ݎ‬ ; (1)
ඥσ(௫ି ௫ҧ )మ (௬ି௬ത)మ
2) modified correlation coefficient:
σ೙ ο௫ ο௫మ೟
‫ݎ‬௠௢ௗ = σ೙೟సమ|ο௫ భ೟ , (2)
೟సమ భ೟ ο௫మ೟ |
ο‫ݔ‬௜௧ = ‫ݔ‬௜௧ െ ‫ݔ‬௜௧ିଵ , i = 1, 2,
while
െ1 ൑ ‫ݎ‬௠௢ௗ ൑ 1;
3) adaptive correlation coefficient, showing changes of
the correlation coefficient in time:
௦೟
‫ݎ‬௧ (ߙ) = , (3)
ௗ೟
where
‫ݏ‬௧ = (1 െ ߙ)‫ݏ‬௜ିଵ + ߙ(ο‫ݔ‬ଵ௧ ο‫ݔ‬ଶ௧ ), (4)
‫ = ݐ‬1,2, … , ܶ,
݀௧ = (1 െ ߙ)݀௜ିଵ + ߙ|ο‫ݔ‬ଵ௧ ο‫ݔ‬ଶ௧ |, (5)
0 < ߙ < 1, െ1 ൑ ‫ݎ‬௧ (ߙ) ൑ 1.
The coefficient r shows the relationship between the
deviations of two series from the mean levels of the process,
but not between rows. The coefficient ‫ݎ‬௠௢ௗ allows one to
speak of a positive or negative correlation in a moment of time
t by coincidence or inconsistency of the signs of the growth of
the variables of interest.
The graph of the function with respect to time shows how
the correlation force at the sampling period changes. The
initial values ‫ݏ‬଴ and ݀଴ are taken as the simple arithmetic
means of the products and the absolute values of the products
of increments, calculated on the basis of the earliest
observations of the sample,
0 < ܶ଴ ൑ ܶ െ 1.
Calculations were performed and graphs of traditional,
modified and adaptive correlation coefficients for quotations
of world indices [4] were constructed. A comparative analysis
of the obtained results clearly demonstrated the following:
x The traditional correlation coefficient does not reflect all
changes in the quotations of the major stock indices, and
has the smoothest schedule;
x The modified correlation coefficient is more sensitive to
data change compared to the traditional one;

‹,(((
x The adaptive correlation coefficient is the most sensitive to The generalized modified coefficient showed a more
the change in data, while its graph most accurately general picture – it reflected only five important periods of the
reflected the known stages that actually took place in the world economy development.
world stock market. The graph on the accumulated results of the increment of
The correlation coefficient calculated for each moment or time series revealed structural shifts in the world economy
period of time from the accumulated results of time series (Table 1).
increments is a function of time, i.e., a time series that can be
used to analyze the correlation relationship of phenomena TABLE 1. TIME PERIODS OF IMPORTANT ECONOMIC EVENTS
considered in time. Multidimensional generalizations of non-
traditional correlation coefficients were calculated. Period
ʋ
(years) ‫ݎ‬௠௢ௗ
The generalization of the modified coefficient [2-4] was
2000 –
calculated by the formula: 1
2006
Period of recovery of world GDP growth rates

σ೙ ο௫ ο௫ … ο௫೔೟ 2006 –
The stage of the most active inflation of bubbles in the
‫ݎ‬௠௢ௗ = σ೙೟సమ|ο௫ భ೟ ο௫ మ೟ … ο௫೔೟ |
, (6) 2
2008
financial markets, which entailed a global financial
೟సమ భ೟ మ೟ crisis
where 3
2008 –
Consequences of the global financial crisis
2011
ο‫ݔ‬௜௧ = ‫ݔ‬௜௧ െ ‫ݔ‬௜௧ିଵ , i = 1, 2.
2011 – The global economy is on the way to recovery from the
4
The denominator in the formula plays the role of a 2015 crisis
normalizing coefficient, The period of "world disorder". The period reflects: the
economic problems of Russia and Ukraine, the state of
െ1 ൑ ‫ݎ‬௠௢ௗ ൑ 1. 5
2016 –
the Chinese and American economies, the problems in
2018
The generalization of the adaptive coefficient was the Middle East, the fight against the crisis in the
Eurozone
calculated from formula (3), where instead of (4) and (5):
Period
‫ݏ‬௧ = (1 െ ߙ)‫ݏ‬௜ିଵ + ߙ(ο‫ݔ‬ଵ௧ ο‫ݔ‬ଶ௧ … ο‫ݔ‬௜௧ ), (7) ʋ
(years) ‫ݎ‬௧
Consequences of the Asian crisis (1997 - 1999). The
݀௧ = (1 െ ߙ)݀௜ିଵ + ߙ|ο‫ݔ‬ଵ௧ ο‫ݔ‬ଶ௧ … ο‫ݔ‬௜௧ |. , (8) 2000 – economic bubble of dotcoms in the USA (2001). Since
1
2006 March 2002, a continuous and almost uninterrupted
‫ = ݐ‬1,2, … , ܶ, increase in oil prices began
݀௧ = (1 െ ߙ)݀௜ିଵ + ߙ|ο‫ݔ‬ଵ௧ ο‫ݔ‬ଶ௧ … ο‫ݔ‬௜௧ |, 0 < ߙ <
2006 –
1. 2
2007
The origin of the mortgage crisis in the USA

Graphs of multidimensional generalized modified

The mortgage crisis began to evolve into a financial one
‫ݎ‬௠௢ௗ and adaptive ‫ݎ‬௧ correlation coefficients of world 3
2007 –
and to affect not only the USA. The World Financial
indices, calculated by the recurrent method, are shown in 2009
Crisis (2008 - 2009)
Figure 1.
2009– The consequences of the global financial and economic
4
2010 crisis of 2008 - 2009
2010-
5 The global economy shows slow economic growth
2012

2015–
6 The period of "world disorder"
2017

Throughout the period, the world was shaken by

terrorist attacks. The refugee crisis created by the
2017 –
7 situation in Syria aggravated in Europe.
2018
The collapse in the Chinese stock market has produced a
shock effect on the entire world market.

Fig. 1. Multidimensional generalizations of the modified and adaptive

III. HYBRID MODEL FOR FORECASTING MULTIDIMENSIONAL TIME
correlation coefficients for all stock indices
The analysis of the graphs shows that the generalized
adaptive coefficient clearly distinguished eight significant
periods of the world economy development, and also caught
crisis events and insignificant rates of economic recovery in
the post-crisis years.
SERIES
Forecasting an economic crisis or bankruptcy is a popular
topic of research in recent decades. World financial crises
have revealed shortcomings of existing economic models that
are not able to prevent the emergence of structural changes.
The financial crisis is a certain economic state in which
economic, social and political shifts lead to chaos in society.
Many factors can be identified as causes of the financial crisis:
unjustified risk in the stock market, inefficient management, predicted time series for the S&P 500 stock index are shown in
inadequate internal control mechanisms, and volatility of Table 2.
financial indicators (Ecer, 2013).
TABLE 2. FORECASTING OF PERIODS OF STRUCTURAL SHIFTS IN
A society that is not capable of predicting structural THE GLOBAL ECONOMI FOR THE STOCK INDEX OF THE S&P 500
changes in the economy will constantly suffer from BY NEURAL NETWORK
unemployment, poverty and a row of other economic Date Point.Forecast
problems. And those who can predict the crisis can use this
information to turn potential disadvantages into advantages. 2018-01-10 3153,44494
2017-12-30 3149,744455
Thus, the forecasting of the financial crisis is important for
politicians, governments, researchers, global investors, etc. It 2017-12-29 3145,959157
is necessary to develop methods for forecasting and preventing

…
crises.
2017-02-01 2683,482734
To predict structural changes in the economy, we propose a 2017-01-31 3268,03508
hybrid model of non-traditional correlation analysis. The input
of the model is given the predicted data on the meaning of the 2017-01-28 3273,76739
six world financial indices (S&P 500, Nikkei 225, DAX, 2017-01-27 3279,565721
FTSE 100, CAC 40, RTSI, SSEC). The future value of the

…
…
time series is modeled with the help of neural networks.
Further, a multidimensional non-traditional correlation 2015-01-30 2200,40846
analysis is performed on the basis of predicted data to reveal
2015-01-29 2199,627314
structural shifts in the economy using formula (3), (6).

…
…
The further movement of the stock index in the hybrid
model is formed by a multilayer perceptron with one hidden 2012-09-12 2595,873798
layer of neurons. The input of the neural network is given the 2012-09-11 2593,003446
values of a time series with a lag and a seasonal lag of the
2012-09-08 2589,982626
stock index in the period from 01/01/2000 to 01/01/2018
(Figure 2).
…

…
2011-09-09 1977,135042
2011-09-08 1964,705604
2011-09-07 1952,495793
…

…
2010-09-24 1932,403569
2010-09-23 1931,740289
…

Fig. 2. Modeling the movement of the S&P 500 stock index for the period of 2008-09-24 1094,824582
the structural shift of 2016 - 2018 (forecast for 2 years) 2008-09-23 1094,400734
2008-08-10 4380,281324
7R FRQVWUXFW XQLIRUP DSSUR[LPDWLRQ ZLWK DFFXUDF\ İ IRU 2008-08-07 4354,766988
any training set represented by the set of inputs
2008-08-06 4331,368673
(‫ݔ‬௜ିଵ , ‫ݔ‬௜ିଶ , … , ‫ݔ‬௜ି௡ )
…

and desired responses

2007-03-24 1631,272629
‫ݔ(ܨ‬௜ିଵ , ‫ݔ‬௜ିଶ , … , ‫ݔ‬௜ି௡ ) 2007-03-21 1637,692807
we introduce the loss function, as well as the penalty 2007-03-20 1644,084428
FRHIILFLHQWȜIURPWKHRQH-parameter Box-Cox transformation.
…

Thus, the model adapts at the structural and parametric level.

2006-02-14 1616,621761
The neural network that best approximates the time series is 2006-02-13 1616,489177
a network with a minimum total mean square error on the
entire training set. The forecast for several steps forward is Currently, the most popular criterion for estimating the
recursively executed. A detailed algorithm for constructing a prediction error is the mean absolute error in percent (Mean
neural network using the experimental "nnetar" function of the Absolute Percentage Error, MAPE). The formula for
R software environment is described in [5]. estimating the error of forecasting time series for n reports has
the form:
The neural network forecast is performed for the period of
ଵ |௬೟ ି௬ො೟ |
the most interesting structural shifts in the economy. The ‫ = ܧܲܣܯ‬σ௡௧ୀଵ ή 100% .
௡ ௬೟
 Comparison of the predictions of each model with real data Furthermore, the Russian economy is extremely
is presented in Table 3. dependent on the price of oil and gas, since the bulk of
Russian export accounts for these resources. The basic
TABLE 3. THE MEAN ABSOLUTE FORECAST ERROR OF THE revenues of the budget just add up from the taxes coming from
PROGNOSIS OF THE MOVEMENT OF THE STOCK INDEX OF THE the exporters of raw materials. All these events destabilize the
NEURAL NETWORK ON THE CONSIDERED PERIODS OF THE economy, as a result we get time series with high volatility,
STRUCTURAL SHIFT
which is difficult to predict.
S&P 500 For the purposes of testing the hybrid forecasting model,
we supplemented the basic set of time series variables
period 2 3 4 5 6 7 (training sample) with the predicted time series for the period
Mape 6,26 8,13 8, 26 25, 79 18,19 5,31 of structural shifts. The hybrid model constructed in this way
was used to reveal structural shifts using multivariate
Nikkei 225 generalization, modified and adaptive correlation coefficients.
The result is shown in Figure 3.
period 2 3 4 5 6 7

Mape 31 29,95 10,97 35,99 29,2 7,5

DAX

period 2 3 4 5 6 7

Mape 15, 93 13,08 17,24 26,8 14,67 7,16

FTSI 100

period 2 3 4 5 6 7
Mape 11,39 16,93 6,94 14, 17 7,5 6,64

CAC 40

period 2 3 4 5 6 7

Mape 10,89 13,80 9,62 23,22 10,47 9,3

RTSI
Fig. 3. Multidimensional generalization of the modified and adaptive
period 2 3 4 5 6 7 correlation coefficients, constructed on the predicted data

Mape 20,78 96,23 56,73 22,27 14,51 15,09 Thus, the multidimensional generalized modified
correlation coefficient revealed only two periods: the pre-crisis
SSEC
(2000 - 2006) and the crisis period together with its
consequences (2006 - 2008).
period 2 3 4 5 6 7
The multidimensional generalized adaptive correlation
Mape 31,26 57,36 38,05 24,27 7,97 10,2
coefficient revealed four periods of structural shifts in the
economy on the predicted data:
The financial time series are characterized by abrupt
deviations of the levels and a dynamic change in the properties The first period (2000 - 2006). The coefficients show the
of the series. In some areas, an approximate constant level of average positive relationship. The gradual recovery of world
the process is observed, while others exhibit dynamic growth GDP growth rates after the Asian crisis (1997 - 1999) and the
with a certain time lag. Thus, the neural network for the dot-com bubble burst (2000) are starting. The growth trend is
Russian stock index RTSI in the third period shows a forecast typical for all countries. Moreover, the United States is the
error of 96.23%. locomotive of economic growth. The growth of the economy
in this period is due to investment activity in the main
The third period is the period of the global financial crisis industries and a slowdown in the growth rate of imports.
(2008 - 2009). This error is connected with the economic Higher rates of economic growth during the current period are
destabilizing features of our country, where the economy is typical for Russia. The share of Russia in the world economy
affected by many factors that cannot be predicted and taken during this period is gradually increasing.
into account in advance. For example, political factors: anti-
Russian sanctions (2014 - 2018), conflict with Ukraine, the The second period (2006 - 2007). On the world financial
Syrian conflict, etc. markets, the stage of the most active inflation of bubbles
began. In 2007, the mortgage crisis began in the United States.
It was the collapse of the US mortgage system that triggered
the global financial crisis of 2008-2009. In mid-2006, the first
forecasts about a possible slowdown in the growth of the
economy in a number of countries began to appear, and, first
of all, in the USA.
The third period (2007 - 2009). The multidimensional
generalized modified correlation coefficient ‫ݎ‬௠௢ௗ and the
multidimensional generalized adaptive correlation coefficient
‫ݎ‬௧ show a negative relationship. The global economy has not
yet recovered from the effects of the global financial crisis. In
London, on April 2, 2009, the G-20 summit was held, at which
the action plan for the withdrawal from the global financial
crisis was adopted. As a result of this plan, the world
economy is on the path of recovery since 2010.
The fourth period (2009 - 2018). The global economy is in
the acute phase of the financial and economic crisis. At the
meeting of the leaders of the G-20 in Shanghai, participants
recognized the pace of recovery of the world economy to be
too weak. There is a deflation, instability of oil prices,
stagnation in the West, a slowdown in GDP growth in the East
and, finally, a sharp drop in the volume of world trade. All this
may lead to the fact that the recovery of economic growth that
began after the crisis of 2008-2009 may be broken, and the
global economy will plunge into long-term stagnation.
In addition, it is necessary to take into account the
influence of events that can be attributed to the category of
geopolitical (redistribution of power in Syria and Iraq, a
deepening Ukrainian conflict) that cannot contribute to the
stabilization of the global economy as a whole.
Thus, the work offers a hybrid model for predicting multi-
dimensional time series, combining the advantages of neural
networks in the field of forecasting, as well as non-traditional
correlation analysis. This model can also be used to predict
macro indicators, as well as stock market indicators, currency,
cash flows, etc.
Non-traditional correlation analysis makes it possible to
obtain more information about time series than classical
analysis. Using multi-dimensional generalizations of the
modified and adaptive correlation coefficients, it is possible to
describe more accurately the evolutionary changes in economic
structures, for example, the appearance of a financial crisis, a
change in socio-political conditions, and so on.
IV. CONCLUSION
The introduced definitions of correlation coefficients have
a number of advantages in comparison with the classical ones.
These approaches, united by the common name "non-
traditional correlation analysis" make it possible to obtain
much more detailed information about the interrelations of
variables than the classical theory offers, and open new
perspectives in understanding complex dynamic systems.
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