Analyses of the structure of group correlations in Korean financial markets

In this paper, we construct and analyze the structure of cross-correlations in two Korean stock markets, the Korea Composite Stock Price Index (KOSPI) and the Korea Securities Dealers Automated Quotation (KOSDAQ). We investigate a remarkable agreement between the theoretical prediction and the empirical data concerning the density of eigenvalues in the KOSPI and the KOSDAQ. We estimate daily cross-correlations with respect to price fluctuations of 629 KOSPI and 650 KOSDAQ stock entities for the period from 2006 to 2010. The research for the structure of group correlations undress the market-wide effect by using the Markowitz multi-factor model and network-based approach. We find stock entities that involve the same business sectors and verify the structure of group correlations by applying a network-based approach. In particular, the KOSPI has a dense correlation besides overall group correlations for stock entities, whereas both correlations are less for the KOSDAQ than for the KOSPI.