Multifractal Detrended Cross-Correlation Analysis of Chinese Stocks

Jingliang Sun, Huanye Sheng

Department of Computer Science and Technology
Shanghai Jiao Tong University
Shanghai, 200240, China
jack sjl@hotmail.com
AbstractIn this paper, we use Multifractal Detrended
Cross-Correlation Analysis(MF-DXA) method to investigate
the cross-correlation of Chinese stocks, which expected to
be correlated. The mentioned data are high frequency data
recorded every 15s during 2009. We analyze the Shanghai
Composite Index (SHCI) and the Shenzhen Component Index
(SZCI), get the cross-correlation exponent 0.60. We determine
generalized Hurst exponent and singularity spectrum. Different
from former researches, the singularity spectrum is well tted
by an intersection of two parabolas. These results provide solid
empirical base for further research of the dynamic mechanism
of stock market price series.
Keywords-multifractal; detrended cross-correlation analysis;
econophysics; Chinese stocks
I. INTRODUCTION
Fractals and multifractals are ubiquitous in natural and
social science. There are many sources of multifractality in
time series can be distinguished. The long-term correlations
between two time series, especially nancial time series is
one of the most important source [1, 2]. As a representative
example of emerging markets, the Chinese nancial market
has attracted a lot of researchers.
In this study, we investigate the cross-correlation of Chi-
nese stock data series, which expected to be correlated.
Recently, a new method named detrended cross-correlation
analysis (DCCA) [3, 4], which is a generalization of the
famous DFA method [5, 6], (which can be adopted to ex-
plore long-range autocorrelations) is proposed to investigate
and quantify the long-range cross-correlation between two
nonstationary time series. This method indicates how much
two series are correlated. To investigate the multifractal
properties of a nonstationary series, MF-DFA [7, 8] was
proposed. Recently, Zhou [9] introduced a method which un-
veils the multifractal features of two cross-correlated signals
and higher-dimensional multifractal measures, which is the
generalization of DCCA. The latter method is named Mul-
tifractal Detrended Cross-Correlation Analysis (MF-DXA).
The strength of the multifractal detrended crosscorrelation
analysis (MF-DXA) method is seen in various phenomena.
The Chinese stock market is an order-driven market based
on the continuous double auction. It is composed of two
stock exchanges, the Shanghai Stock Exchange and the
Shenzhen Stock Exchange [10]. Many researches based on
cointegration technique [11] indicate that long equilibrium
relationship between Shanghai and Shenzhen stock market
and market linkage is obvious. But the traditional method
is only for stationary data. In this paper, we use the
new method (MF-DXA) to examine such kind of linkage.
Without loss of generality, we choose Shanghai Composite
Index (SHCI) and Shenzhen Component Index (SZCI) to
represent the stocks of Shanghai stock market and the stocks
of Shenzhen stock market.
II. DATA ANALYZED
We analyze the Shanghai Composite Index (SHCI) and
the Shenzhen Component Index (SZCI) recorded every 15s
over the year 2009 (231,312 total data points). Both data
sets are taken from http://bbs.gw.com.cn. The original data
set for Shanghai stock market is 3s high frequency data and
for Shenzhen stock market is 5s high frequency data. In
order to keep the data consistency, we reform both data sets
to 15s high frequency data.
Then, for each of the indices, we calculate the logarithmic
change in price S(t),
R
t
= ln(
S(t + 1)
S(t)
). (1)
III. INTRADAY PATTERN
In contrast to daily volatilities, the intraday data are
known to show specic patterns. For most modern nancial
markets, traders are more active around the opening time
due to information arriving while the market is closed. In
order to investigate the cross-correlation between SHCI and
SZCI, we need to remove the intraday pattern.
9:30 10:30 11:30 13:00 14:00 15:00
0.8
1
1.2
1.4
1.6
1.8
2
x 10
3
time
A
(
s
)

SHCI
SZCI
Figure 1. The intraday patterns of SHCI and SZCI during year 2009.
2010 Third International Conference on Business Intelligence and Financial Engineering
978-0-7695-4116-7/10 $26.00 2010 IEEE
DOI 10.1109/BIFE.2010.77
301
The intraday pattern, denoted as A(s) [12], is dened as
A(s) =
N

i=1
|R
i
(s)|
N
, (2)
which is the return at a specic moment s of the day
averaged over all N trading days (in this paper N = 244),
and R
i
(s) is the price change at time s in day i. As shown in
Figure 1, the intraday pattern has similar behavior for both
SHCI and SZCI. To avoid the effect of this daily oscillation,
we remove the intraday pattern by studying
R

t
=
|R
t
|
A(s)
. (3)
In order to compare different stocks, we dene normalized
volatility G
t
by dividing R

t
with its standard deviation,
G
t
=
R

t
((R

t
)
2
R

2
)
1/2
. (4)
IV. MULTIFRACTAL DETRENDED CROSS-CORRELATION
ANALYSIS
Multifractal detrended cross-correlation analysis consists
of ve steps. Suppose that {G
x
k
} and {G
y
k
} are two series
of length N.
A. Step 1.
Determine the prole
X(i) =
i

k=1
[G
x
k
G
x
], i = 1, . . . , N,
Y (i) =
i

k=1
[G
y
k
G
y
], i = 1, . . . , N,
(5)
The calculated integrated proles was shown in Figure 2.
Note that from this denition one has Y (N) = 0.
0 0.5 1 1.5 2
x 10
5
2000
0
2000
4000
6000
8000
10000
12000
14000
time
I

(
N
)


SHCI
SZCI
Figure 2. Integrated proles for SHCI and SZCI.
B. Step 2.
We divide our prole into N
s
= [N/s] nonoverlapping
segments of length s. Since in general s and N are incom-
mensurate numbers, a rest part may remain. In some articles,
they starting from the opposite end and do this procedure
again. But we just omit the remaining part in this paper.
C. Step 3.
The aim of this step is to detrended prole, in each
segment of given length s, separately. The least-square t
is made by determination of the covariance functions for
each segment v = 1, . . . , N
s
f
v
(s) =
1
s
s

k=1
[X[(v 1)s + k]

X
v
(k)]
[Y [(v 1)s + k]

Y
v
(k)].
(6)
Where,

X
v
(k) and

Y
v
(k) is the tting polynomial in
the segment v of order n. Hence, we call the Multifractal
Detrended Cross-Correlation Analysis as the MF-DXAn,
respectively (i.e. the n-th order of the MF-DXA). In this
paper, Linear function was used in the tting procedure.
D. Step 4.
Average over all segments to obtain q-th order detrended
covariance, dened by
F
xy
(q, s) = [
1
N
s
Ns

v=1
|f
v
(s)|
q/2
]
1/q
, (7)
when q = 0 and
F
xy
(0, s) = exp[
1
2N
s
Ns

v=1
ln|f
v
(s)|]. (8)
.
When X = Y , the above method reduces to classic
multifractal DFA. For q = 2, the standard DFA procedure
is retrieved.
E. Step 5.
In this stage we determine the scaling behavior of the
utuation functions by analyzing log-log plots of F(q, s)
versus s for each value of q.
One technical question arises here, how large or how small
the length s of the single segment should be? Denitely, if
s is too small then the estimation of f
v
(s) is too bad. On
the opposite side, if s is too large then the estimation of
uctuation function F
xy
(q, s) is too bad. In this article, the
choice 10
0.8
s N/10
1.8
seems to be the reasonable
one.
302
1 1.5 2 2.5 3
0
10
log(s)
F
x
x

,

F
y
y

,

F
x
y
(
s
)


h
xx
(2)=0.56
h
xx
(5)=0.56
h
yy
(2)=0.59
h
yy
(5)=0.59
h
xy
(2)=0.60
h
xy
(5)=0.61
(a) Power-law scaling in Fxx, Fxy, Fyy.
10 5 0 5 10
0.5
1
1.5
2
q
h
(
q
)


h
xx
h
yy
h
xy
(b) General scaling exponents h(q) estimated using MF-DXA.
Figure 3. Power-law scaling behavior
V. RESULTS OF ANALYSIS
The result was shown in Figure 3a. The scaling relation
between the detrended uctuation F
xy
(q, s) and scale s can
be determined as follows,
F
xy
(q, s) s
hxy(q)
, (9)
where h(q) is called generalized Hurst exponent. For q =
2, h
xy
(q) = 0.60 0.01. In Figure 3b, we presented the
behavior of h(q) versus q.
Moreover, it is reported for some phenomena that the
relation between the generaliezed cross-correlation exponent
h
xy
(q) and individual Hurst exponents (h
xx
(q), h
yy
(q)) is as
follows,
h
xy
(q) = [h
xx
(q) + h
yy
(q)]/2. (10)
But as a result of our calculation, h
xy
(q) is greater
than max{h
xx
(q), h
yy
(q)}. Since the presence of negative
correlations, f
v
(s) may be smaller than 0, so we add the
| | in Equation(7), it might cause the result bigger than
the normal one. Another choice is to modify Equation(7) as
follows,
F
xy
(q, s) = [
1
N
s
Ns

v=1
sgn(f
v
(s))|f
v
(s)|
q/2
]
1/q
, (11)
but it might cause F
xy
(q, s) smaller than 0. This issue was
discussed in some paper.
In general, h
xy
(q) depends on q, indicating the presence
of multifractality. In other words, we want to point out how
two series are cross correlated in various time scales. To
clarify this correlation, we need to calculate the sigularity
spectrum.
In order to calculate the singularity spectrum, the depen-
dence of the global scaling exponent
(q) = qh(q) 1 (12)
versus q was shown in Figure 4a. For large values of |q|(
2), (q) can be tted well as straight lines. The emphasized
central part of the global scaling exponent (q) (|q| 2) can
be tted by the polinomial of the second order. The result
was shown in Fig 4b.
Next, we can introduce the spectrum of local dimensions
f() from the global scaling exponent via a Legendre
transformation, as in the case of one series. Here, is the
singularity strength or H older exponent, while f() denotes
the dimension of the subset of the series that is characterized
by ,
=
d(q)
dq
f() = q (q).
(13)
The result was shown in Fig 4c. Unlike former researches,
we found that the sigularity spectrum cant tted by the
polinamial of second order, but well tted by the intersection
of two parabolas.
f() =

2.46
2
+ 3.78 +0.38 1.0955
1.74
2
+ 4.11 +1.58 > 1.0955
(14)
The growth of the width of f() or equivalenty shows
the increase in the degree of mulitifractality of two couple
signals.
Similar results can be obtained not only by analyzing
cross-correlations between prices changes between SHCI
and SZCI, but also volume changes between SHCI and
SZCI. This result is especially interesting. Long-range cross
correlations between two stocks imply that each stock sep-
arately has long memory of its own previous values and,
addtionally, has a long memory of previous values of the
other stock [3]. That is to say, according to our study, SHCI
and SZCI are power-law correlated to each other, as we
expected. In some articles, its reported the existence of long-
range cross correlation between price change and volume
change of one stock [4]. But we failed to get a well tted
power law scaling behavior by using high frequency SHCI
and SZCI data.
303
VI. CONCLUSIONS
In this paper, we study the cross-correlation between
Chinese stocks. We study the SHCI and SZCI as the rep-
resentative example of Chinese stocks. Traditional method
cant quantify the cross-correlation exponent between two
correlated time series in the presence of nonstationary. MF-
DXA method can reveal the long-term cross-correlation
between two nonstationary signals. We applied MF-DXA to
explore multifractal behavior and cross-correlation between
SHCI and SZCI which are high frequency nacial data.
We have shown how these time series are correlated in
various scales. We also calculate generalized Husrt exponent
h
xy
(q). We determine singularity spectrum f(). Unlike
former researches, its well tted by an intersection of two
parabolas.
ACKNOWLEDGMENT
We thank W.-X. Zhou for discussing some details about
the MF-DXA algorithm and sharing his matlab program.
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10 5 0 5 10
20
15
10
5
0
5
10
q

(
q
)

xy
(a) The global scaling exponent (q) versus order q.
2 1 0 1
3.5
3
2.5
2
1.5
1
0.5
0
q

(
q
)
(b) The central part of the global scaling exponent.
0 0.5 1 1.5 2
0
0.2
0.4
0.6
0.8
1
1.2
1.4

f
(

)
(c) The spectrum of local dimensions f() versus .
Figure 4. Multifractal behavior
304