A novel population analysis approach for analyzing financial markets under crisis - a focus on excess returns of the US stocks under 9/11 and COVID-19

Abstract

ABSTRACT Since the seminal research of Harry Markowitz, the importance of Pareto Optimal portfolios and asset correlation has been a foundation of modern portfolio theory. Recent researchers have expanded on Markowitz-efficient portfolios using advanced statistical methods to identify correlations among assets, while other researchers have demonstrated the decline in asset correlations during periods of market volatility and economic shocks. We extend this research by applying a novel approach based on the concept of population analysis to study the correlation of assets under major economic shocks. We use similarity networks to investigate the impact of the COVID-19 pandemic on various sectors, and then compare it with the behavioural patterns associated with the 9/11 event. The population analysis revealed that during the current pandemic, the behavioural pattern of the finance and energy sectors was significantly different than other sectors. Similar results were found for the finance and the industrial sectors during the 9/11 attacks.