International Journal of Bifurcation and Chaos, Vol. 26, No.

2 (2016) 1630004 (19 pages)

c World Scientific Publishing Company

DOI: 10.1142/S0218127416300044

Nonlinear Analysis on Cross-Correlation of Financial Time

Series by Continuum Percolation System
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Int. J. Bifurcation Chaos 2016.26. Downloaded from www.worldscientific.com

Hongli Niu∗ and Jun Wang
Institute of Financial Mathematics and Financial Engineering,
School of Science, Beijing Jiaotong University,
Beijing 100044, P. R. China
∗niuhonglibjtu@yeah.net

Received February 17, 2014; Revised January 12, 2015

We establish a financial price process by continuum percolation system, in which we attribute

price fluctuations to the investors’ attitudes towards the financial market, and consider the
clusters in continuum percolation as the investors share the same investment opinion. We
investigate the cross-correlations in two return time series, and analyze the multifractal
behaviors in this relationship. Further, we study the corresponding behaviors for the real stock
indexes of SSE and HSI as well as the liquid stocks pair of SPD and PAB by comparison. To
quantify the multifractality in cross-correlation relationship, we employ multifractal detrended
cross-correlation analysis method to perform an empirical research for the simulation data and
the real markets data.

Keywords: Nonlinear analysis; financial price model; continuum percolation system; cross-
correlation; multifractal; MF-DCCA.
1. Introduction
In recent years, due to the flourishing
development in the area of complex systems
as well as data measurements and data
analysis, much progress has been made for
examination and interpretation of financial
price changes which exhibit some interesting
dynamical properties such as volatility
correlation, heavy tail distribution, scale
invariance and multifractality of volatility, etc.,
see [Black & Scholes, 1973; Calvet & Fisher,
2008; Fang & Wang, 2012; Feder, 1998; Ilinski,
2001; Mandelbrot et al., 1997; Mantegna,
1999; Mills, 1999; Niu & Wang, 2013a, 2013b,
2013c; Peters, 1994; Plerou, 1999; Zhang &
Wang, 2010]. Moreover, it has been clarified
that a remarkably wide variety of
simultaneously recorded time series are
characterized by spatial or temporal cross-
correlations [Jun et al., 2006; Podobnik &
Stanley, 2008; Podobnik et al., 2009; Shadkhoo
& Jafari, 2009; Shao & Wang, 2010], and much
empirical research has made a great attempt
to quantify the cross-correlations between the
real systems. Shao and Wang [2010]
developed a financial price model by using
statistical physics systems to study the
statistical behaviors of chain (or cross)
reactions between two stock market indexes.
Jun et al. [2006] proposed a detrended cross-
correlation approach to quantify the
correlation between positive and negative
fluctuations in a single time series. Podobnik
and Stanley [2008] developed the detrended
cross-correlation analysis (DCCA) to
investigate power-law crosscorrelations
between two simultaneously recorded time

1630004-1
 H. L. Niu & J. Wang
series in the presence of nonstationary factors.
Further, this method is extended to uncover
longrange power-law cross-correlations in the
random part of the underlying stochastic
process and the cross-correlations between
absolute volume change and price change of
Dow Jones and Nasdaq. The multifractal
behaviors of two cross-correlation time series
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exhibit that the scaling geometry of the market
patterns
Int. J. Bifurcation mayDownloaded
Chaos 2016.26. be better described by a
from www.worldscientific.com 2010; Wang et al., 2011; Yu & Wang, 2012;
spectrum of the multifractal exponents, see
[Jun et al., 2006; Podobnik & Stanley, 2008;
Podobnik et al., 2009; Shadkhoo & Jafari,
2009].
As the stock markets are deregulated by
the governments all over the world, it is
becoming an important problem to model the
dynamics of the forwards prices in the risk
management, derivatives pricing and physical
assets valuation. And it is important to
understand the statistical behaviors of
fluctuations of stock prices in globalized
securities markets. For the financial modeling,
any model aiming at understanding price
fluctuations needs to define a mechanism for
the formation of the price. Recently, adequate
models of financial price process have been
proposed in order to have a better
understanding of dynamics of financial
markets, see [Chakraborti et al., 2011; Hens &
Schenk-Hoppe, 2009; Lux & Marchesi, 1999;
Mike & Farmer, 2008]. For example, Lux and
Marchesi [1999] introduced an agent-based
model in which chartist agents compete with
fundamentalist agents, leading to power law
distributed returns as observed in real
markets which contradicts with the popular
efficient market hypothesis. Mike and Farmer
[2008] built an empirical behavioral models
where order placement and cancelation
models were proposed and fitted to empirical
data. In the book written by Hens and Schenk-
Hoppe [2009], many famous and important
price modeling processes were reviewed
within the emerging field of dynamics and
evolution in financial markets. Furthermore,
Plerou et al. [2000] pointed out that economic
systems such as financial markets are similar
to physical systems in that they are comprised
of a large number of interacting “agents”.
1630004-2
These economic agents are “thinking” units
and they interact in complicated ways. Some
research work has been done, by applying the
statistical physics systems [Durrett, 1988;
Grimmett, 1989; Meester & Roy, 1996; Roy,
1990; Stauffer & Aharony, 2001; Wang, 1998],
to describe and investigate the fluctuations of
stock prices, see [Fang & Wang, 2012; Wang &
Wang, 2013a; Wang & Deng, 2008; Wang et al.,
Zhang et al., 2010]. Zhang et al. [2010]
proposed the finite-range contact particle
system [Durrett, 1988] to model a stock price
process for studying the behaviors of returns
by statistical analysis and computer
simulation. The epidemic spreading in the
contact model is considered as the spreading
of the investors’ investment attitudes towards
the stock market, and they supposed that the
investment attitudes are represented by the
viruses of the contact model. These attitudes
lead to the investors buying stock positions,
selling stock positions or holding stock
positions. Stauffer [1998], Wang and Wang
[2012], and Yu and Wang [2012] developed a
price model by using the lattice percolation
system [Durrett, 1988; Grimmett, 1989], in
which the local interaction or influence among
traders in a stock market is constructed, and a
cluster of percolation is applied to define the
cluster of traders sharing the same opinion
about the market. They assumed that the
spread of information leads to the stock price
fluctuation, and when the influence rate of the
model is around or at a critical value, the
existence of fat-tail behavior for the returns is
clearly observed. The critical phenomena of
percolation model is used to illustrate the herd
behavior of stock market participants.
Motivated by their work, in the present paper,
a financial price model based on the
continuum percolation [Grimmett, 1989;
Meester & Roy, 1996; Roy, 1990; Wang, 1998]
is developed to explore the behaviors of price
changes in the financial markets. We also
consider the real financial market data pairs:
the indexes of Shanghai Stock Exchange (SSE)
Composite Index and Hang Seng Index (HSI),
the liquid stocks of Shanghai Pudong
Development (SPD) Bank from Shanghai Stock
 Nonlinear Analysis on Cross-Correlation of Financial Time Series

Exchange and Ping’an Bank (PAB) from In the present paper, we consider the
Shenzhen Stock Exchange, and we make use of twodimensional continuum percolation, see
multifractal detrended cross-correlation Fig. 1 in which three percolation clusters with
analysis (MF-DCCA) method to analyze the different lengths are shown. When we connect
cross-correlation relationships and the the centers of the adjacent circles, the cluster
multifractal features of returns for both the exhibits tree-like branching of connectivity. In
actual data and the simulation data. fact, the complexity of the cluster depends on
the intensity of λ and the circle’s radius. For
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simplicity, we assume the same radii of
2. Financial Price Model by Continuum
Int. J. Bifurcation Chaos 2016.26. Downloaded from www.worldscientific.com spheres, ri = r, i ≥ 1. In the area of [−2/l,2/l]2 of
Percolation R2 (where l is a positive integer), two spheres
are said to be adjacent if their centers are
2.1. Description of continuum
separated by less than one diameter. We take
percolation system
x0 for the Poisson point nearest to the origin.
We give a brief description of the continuum
percolation [Grimmett, 1989; Meester & Roy,
1996; Roy, 1990]. Continuum percolation
system was proposed by Gilbert (1961),
motivated by multihop communication of
wireless broadcasting stations, which
established the foundation of continuum
percolation. Meester and Roy [1996] described
many mathematical extensions in literature.
Let X = {ξ1, ξ2,...} be a homogeneous Poisson
point process with some intensity parameter λ
on d-dimensional Euclidean space Rd. At each
point ξi, we place a sphere C(ξi) of radius ri,
where radii of r1,r2,... of random variable r are
i.i.d. non-negative variable and independent of
the blue Poisson point X. We are interested in
the shape of a cluster which is defined as a set Fig. 1. The graphical presentation of two-dimensional
continuum percolation system. The centers of the
circles are the points of a Poisson process and the
of overlapping spheres. Let adjacent circles form the percolation cluster.
Let C l(x0) be the maximum adjacent subset in
denote the sphere C(ξj) centered at point ξj. X including x0 in [−2/l,2/l]2, which is called the
˜ ˜
Two spheres C(ξ i) and C(ξ j) are said to be percolation connective cluster (or the
adjacent if percolation cluster). Let l → ∞, if there is a
). These point x0 satisfying |C ∞(x0)| = ∞ in R2, we say
two
that this cluster is an infinite cluster. In light of
spheres are said to be in the same cluster if
˜ ˜ ˜ ˜ the continuum percolation theory, we know
there exists sequences ξ i1, ξ i2,...,ξ ik such that ξ i1
that there exists a nontrivial critical intensity
˜
= ξ i, λc which is formally defined by
[Meester & Roy, 1996; Roy, 1990] λc =

1, and inf{λ ≥ 0,Pλ(|C ∞(x0)| = ∞) > 0}

ber of spheres belonging to it. For the details,
such that (almost surely) an infinite cluster
see [Meester & Roy, 1996; Roy, 1990].
does exist with positive probability when λ >

1630004-3
 H. L. Niu & J. Wang
λc and not when λ < λc. From [Meester & Roy,
1996] we know that in R2, 0.174 < λc < 0.843. In
the computer simulation of the proposed
model, we usually consider the cases for
when combining with variations of
other parameters sets, such as area length l
and circle radius r. In the research work
[Wang et al., 2015], many discussions can be
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found about the computer simulation under or
above
Int. J. Bifurcation Chaosthe critical
2016.26. valuefrom
Downloaded λc. www.worldscientific.com
2.2. Modeling the financial price
process
In this section, a financial price process and
the corresponding return process are
developed by the two-dimensional continuum
percolation. We mainly attribute the
fluctuations of stock prices in the market to
the investors’ attitudes toward the market,
that is, the spread of news or information in
the market can affect the stock price changes.
Suppose that traders are arranged at the
Poisson points of X, and the percolation
connective cluster represents that the traders
at this cluster share the same investing
opinion about the market. Each investor can
trade the stock on each trading day t ∈
{1,2,... ,L}, but at most one unit number of the
stock at each time. In the area [−2/l,2/l]2, let Ct
denote the discs in two-dimensional
continuum percolation with radius r, which
represents the investors in the market on the
tth day. At the beginning of trading on each
day, it is supposed that only the investor at the
origin Poisson point x0 receives some news. We
define a random variable ωt to represent this
investor who takes buying opinion (ωt = +1),
selling opinion (ωt = −1) or neutral opinion (ωs
= 0) with probabilities α, β or 1 − (α + β),
respectively. Then this investor sends bullish,
bearish or neutral signal to his neighbors.
According to the theory of continuum
percolation, investors can affect each other
and the news can be spread on the percolation
˜ parameter sets {λ = 4.5,l = 120,r = 2.5} and {λ =
cluster. Let C t(x0) denote the set of investors
who share the same news with the investor at
the origin point x0. For a fixed trading day t, let
1630004-4
Bt .
From the above description and [Lamberton &
Lapeyre, 2000; Ross, 1999], we define the
stock price
Pt = exp{γBt}Pt−1
where γ(> 0) is a constant coefficient that
denotes the depth parameter of the market,
which is taken as 1/10 in the present paper.
Let P0 be the initial price of the stock price, for
t = 1,2,... ,L, we have
Pt = exp i
.
In this paper, we investigate the statistical
behaviors of the logarithmic returns which are
defined as follows
R(t) = lnPt − lnPt−1.
3. Cross-Correlation and
Multifractality Analysis
We intend to examine the cross-correlation
relationships and the multifractal properties of
the simulated returns for the proposed
financial price model (L = 2000), and those of
the daily returns for the real Chinese stock
markets, Shanghai Stock Exchange (SSE)
Composite Index and Hang Seng Index (HSI)
from January 30, 2003 to December 1, 2010,
the liquid stocks of Shanghai Pudong
Development (SPD) Bank from Shanghai Stock
Exchange and Ping’an Bank (PAB) from
Shenzhen Stock Exchange with the time period
of March 20, 2003 to December 1, 2010. The
total number of observed data is about 2000
for SSE, HSI, SPD and PAB respectively [Zheng,
2003]. In the present paper, for different
parameter values of the intensity λ, the length
l, and the radius r, we study the statistical
behaviors of returns for the price model. In
Fig. 2, the graphical representations of returns
for the financial price model (with the
4.3,l =
 Nonlinear Analysis on Cross-Correlation of Financial Time Series

120,r = 2.5}) are exhibited, and the

corresponding

0.1 λ =4 .5 0.1 λ =4 .3
0.05 0.05
returns
returns

0 0
−0.05
−0.05
−0.1
−0.1

0 500 1000 1500 2000 0 500 1000 1500 2000

days days

0.1
SSE 0.1 HSI
0.05
0.05
returns

returns

0 0

−0.05
−0.05

−0.1
−0.1
0 500 1000 1500 2000 0 500 1000 1500 2000
days days
Fig. 2. Fluctuations of returns for the price model with the parameters λ = 4.5 and 4.3, l = 120, r = 2.5. Fluctuations of daily returns
for SSE and HSI from January 30, 2003 to December 1, 2010.

1630004-5
 H. L. Niu & J. Wang

fluctuations of returns for SSE and HSI are also

illustrated.

3.1. Statistical analysis of return time

series
Recently, the study on the behaviors of
crosscorrelation relationships among different
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financial time series has attracted a wide
attention
Int. J. Bifurcation in financial
Chaos 2016.26. Downloadedresearch. In this section,
from www.worldscientific.com
we test the presence of cross-correlation
relationships qualitatively between two
where .
different return time series by the statistical
Further, we have
method [Jun et al., 2006; Podobnik & Stanley,
2008; Podobnik et al., 2009]. Assume that {xk}
and {yk} are two discrete time i.i.d. random
processes with the same time length L, sharing
no cross-correlations between them. The
crosscorrelation function of two random
processes {xk} and {yk} is defined as
.
The cross-correlation coefficient Ci is
normally distributed for asymptotically large
values of L. Therefore,
asymptotically behaves as a Gaussian
. distribution with zero mean and unit variance,
Since the processes {xk} and {yk} are and the sum of squares of these variables
approximately follows a χ2 distribution.
independent, then we can show that Ck are According to the definition of χ2 distribution,
we have the cross-correlation statistic
uncorrelated:

which is approximate to χ2(m) distribution

with m degrees of freedom. If there exist no
cross-correlations between two time series,
the cross-correlation test agrees well with the
χ2(m) distribution. And if the cross-correlation
which is zero for , and E(Ck) = 0. The test exceeds the critical value of the χ2(m)
corresponding variance is distribution (Qcc(m) > χ20.95(m)), then the cross-
correlations are significant, and the difference
between Qcc(m) and the critical value can
describe the strength of crosscorrelations.
In the following, we consider seven cases
of parameter sets for two return processes: (i)
The intensity parameters λ = 4.5 and 4.3 with
the same values l = 120, r = 2.5 (short for λ =
4.5 and

1630004-6

4.3), i.e. we consider the parameter sets of {λ =
4.5, l = 120,r = 2.5} and {λ = 4.3,l = 120,r = 2.5}
for the price model respectively; (ii) the length
parameters l = 120 and 125 with the same
values λ = 4.0, r = 2.5 (short for l = 120 and
125); (iii) the radius parameters r = 2.8 and
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3.0 with the same values λ = 3.5, l = 125 (short
forChaos
Int. J. Bifurcation r = 2016.26.
2.8 and r = 3.0);
Downloaded (iv)
from the intensity and
www.worldscientific.com
length parameter sets are {λ = 4.4,l = 130} and
{λ = 4.8, l = 125} with the same radius
parameter r = 2.5; (v) the length and radius
parameter sets are {l = 125,r = 2.8} and {l =
130,r = 3.0} with the same intensity λ = 4.3;
(vi) the intensity and radius parameter sets
are {λ = 4.0,r = 2.3} and {λ = 4.3,r = 2.1} with
the same length l = 130; (vii) three parameters
change simultaneously. The parameter sets
are {λ = 3.8,l = 120,r = 2.5} and {λ = 3.5,l =
130,r = 3.0}. In fact, the above three
parameters play very important roles in the
financial model. The intensity λ relates to the
density of investors in the market. As λ
increases, the market becomes
swarming which means investors are more
likely to group together, resulting in large
fluctuations of the stock prices. The length l
represents the market area. The longer the
length l is, the larger the market area is,
causing the investors to be relatively “far”
from each other and less likely to form groups
and resulting in smaller movement of the
stock prices. The last parameter radius r
reflects the sight of the investors or the
investors’ influence. An increase in the sight of
the investor allows the investors to exchange
information with each other more easily so
that the investing information can be widely
spread among the market participants. When
Nonlinear Analysis on Cross-Correlation of Financial Time Series
we perform the computer simulation of
financial time series, we need to adjust the
model parameters cautiously and properly
through trial and error. Usually for simplicity,
we fix two parameters and constantly modify
values of the other one to find an approximate
model since not all the parameter sets are
suitable to the real financial market, for
example, too large intensity λ (density of
investors) and too small radius r (sight of
investors) will result in no existence of
percolation clusters in the model, which makes
no sense to us. Various parameter sets will
produce multiple financial time series. To save
space, in the present paper we display the
statistical analysis results of the simulated
returns just for the above-mentioned seven
cases.
In Fig. 3(a), we show the cross-correlation
functions of pair returns for the simulation
data of the first three parameter sets (the
results of other four cases are similar) and the
real market data of SSE and HSI. The cross-
more correlation functions are outside the values at
95% confidence interval first for some time
lags but stay within 95% confidence interval
with lags increasing. Also, we calculate the
crosscorrelation statistic Qcc(m) for different
degrees of freedom m along with the critical
values for the χ2(m) distribution at 5% level of
significance. From Fig. 3(b), we see that all the
values Qcc(m) are evidently larger than the
critical values of χ2(m), except for the
simulated return pair of r = 2.8 and r = 3.0
(Simu3), in which its Qcc(m) values are larger
than χ2(m) for m > 300, while Qcc(m) are
smaller than χ2(m) when degree of freedom m
is in the approximate interval [150, 300] and
almost equal to χ2(m) values when m < 150.
Meanwhile, we can observe that the values
Qcc(m) of returns for SSE and HSI are quite
evidently far from the values of χ2(m), which
suggests that there is a stronger cross-
correlation than those of other pairs of
1630004-7
 H. L. Niu & J. Wang

simulation data as well as the pair of SPD and

PAB.
3.2. MF-DCCA method for time series
In this part, we introduce one of the analysis
methods in the research of multifractal
features between two cross-correlated
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nonstationary time series, namely MF-DCCA
method (multifractal detrended cross-
Int. J. Bifurcation Chaos 2016.26. Downloaded from www.worldscientific.com
correlation analysis) [Calvet & Fisher, 2008;
Mandelbrot et al., 1997; Podobnik & Stanley,
2008; Podobnik et al., 2009; Shadkhoo & Jafari,
2009], which is a combination of DCCA and
MF-DFA (multifractal detrended fluctuation
analysis). We consider two time series {xk} and
{yk} of same time length L as follows:
.
(ii) Dividing each of the profiles into Ns ≡
int(L/s) nonoverlapping segments of equal
length s, and then computing the fluctuation
function for each of the segments. In order to
take the whole series into account when the
size of the data sets is not a multiple of
considered time scale s, we repeat the same
procedure starting from the opposite end.
Thereby, 2Ns segments are obtained
altogether. For v = 1,...,Ns, we define

(i) Calculating the “profiles” of two time

series {xk} and {yk} as, for i = 1,...,L and for v = Ns + 1,...,2Ns

(a)

1630004-8
 Nonlinear Analysis on Cross-Correlation of Financial Time Series

(b)

Fig. 3. (a) Cross-correlation functions of returns for the simulation data pair and the actual data pair of SSE and HSI and
(b) cross-correlation statistic Qcc(m) of the pair returns for different degrees of freedom m.
where the fitting polynomials in xv(i) and yv(i) exponents τxy(q) and q can be shown by
are selected as the n-order polynomials in Shadkhoo and Jafari [2009] τxy(q) = qhxy(q) − 1.
segment vth.
(iii) Averaging the local fluctuation function If τxy(q) is linear with q, the cross-correlation of
overall the parts, which is given by correlated series is monofractal, otherwise it is
multifractal. By the Legendre transformation,
we can obtain the following relationships

.
The strength of
multifractality can be
,
estimated by the width
For q = 2, the standard DCCA is retrieved. of multifractal
spectrum, which is given by. Further, we can
(iv) Calculating the slope of the log–log plot estimate the fractal
ofFq(s) versus s. This directly determines the
scaling exponent hxy(q), which can describe the
powerlaw relationship between two asymmetric exponent [Deng & Wang, 2014],
temporally correlated time series as defined as FAE = ( ),
Fxy(q,s) ∝ shxy(q). where are given by αmin and
. Here ˆ is the value on
condition that f(αˆ) = maxf(α). From the
Especially, if the time series x is identical definition, we see that the positive FAE and
to y, MF-DCCA is equivalent to MF-DFA; and if negative FAE represent respectively the fractal
q = 2, the cross-correlation exponent hxy(q) is left-asymmetry and fractal right-asymmetry.
equivalent to the well-known generalized The larger magnitude of FAE value indicates
Hurst exponent h(2) [Hurst, 1951; Mantegna, the stronger asymmetry.
1999; Peters, 1994]. The similar relationship
between classical multifractal scaling

1630004-9
 H. L. Niu & J. Wang

3.3. Empirical research for financial series is also estimated by means of MF-DFA.
model and real markets Figure 6 displays the comparison analysis
We make the empirical research of return time results of three simulated cases and real data.
series for the price model and the real stock From the figure we can observe the
markets by MF-DCCA method. In the following, multifractal properties of the individual return
the order q ranges from series.
−10 to 10, the scale s Furthermore, we obtain the numerical
ranges from results for the cross-correlation exponents and
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generalized
(where denotes the integer part of a), and
Int. J. Bifurcation Chaos 2016.26. Downloaded from www.worldscientific.com Hurst exponent when q = 2. Table 2 gives
the polynomial order n can take the values of results
{1,2,3}. For the cubic fitting polynomials (n =
3), Figs. 4(a)–4(c) show the log–log plots of
Fxy(q,s) versus s between the pair return time
series of the financial model for three cases of
parameter sets (which are given in Sec. 3.1),
and Figs. 4(d) and 4(e) exhibit the
corresponding plot for real markets data, SSE
and HSI as well as SPD and PAB. The linear
relationship between logFxy(q) and logs
suggests that, for both financial price model
and real markets, the relationships of each pair
returns are power-law cross-correlated, such
as SSE is power-law cross-correlated with HSI.
The power-law cross-correlation relationship
indicates that a large increment of price
changes in one market may be more likely to
be followed by a large increment of price
changes in the other geographically or
temporally correlated market.
The specific calculation results of hxy(q) for
various q and n are presented in Table 1. It is
seen that hxy(q) is numerically decreasing with
q increasing for n = 1,2,3, respectively. The
cross-correlations of three pair returns for the
financial model are very similar to those for
real market data pairs of SSE and HSI, SPD and
PAB. In Fig. 5(a), we show the fluctuation
behaviors of the cross-correlation exponents
hxy(q) for the polynomial order n = 3 of all the
simulated return pairs and real data. If
exponent hxy(q) is a constant, the market is
monofractal, otherwise it is multifractal. These
plots exhibit that the cross-correlation
relationships are nonlinear and multifractal,
since there are dissimilar exponents hxy for
different values of q, i.e. there are different
power-law cross-correlations. To make a
comparison, the generalized Hurst exponent
h(q) of each individually analyzed return

1630004-10
 Nonlinear Analysis on Cross-Correlation of Financial Time Series

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Int. J. Bifurcation Chaos 2016.26. Downloaded from www.worldscientific.com

(a) (b)

−1.5

(c) (d)

−3.5

(e)

1630004-11
 H. L. Niu & J. Wang

Fig. 4. Log–log plots of Fxy(q,s) of returns for the simulation data and the actual data.
Table 1. Scaling exponents hxy(q) with q varying from−10 to 10.

0 SSE and HSI SPD and PAB

Data
q n =1 n =2 n =3 n =1 n =2 n =3 n =1 n =2 n =3 n =1 n =2 n =3 n =1 n =2 n =3
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− 1 0.60300.65340.66300.63300.62920.65300.64750.68400.70210.65250.65540.67890.66530.66540.6467
− 6 0.57290.60610.62150.58840.59560.62180.61450.64300.66150.61460.61780.62970.63620.63200.6110
Int. J. Bifurcation Chaos 2016.26. Downloaded from www.worldscientific.com
− 3 0.54820.56420.58210.55230.57370.59860.57860.60170.62100.57800.56930.58300.59770.58840.5722
− 1 0.53160.53810.55500.54670.56790.58820.55370.57440.59300.55450.54440.55930.55490.54480.5411
0 0.52060.52280.53820.55530.55810.58450.54240.56170.57860.54070.53080.54580.52860.51710.5220
1 0.51060.50890.52290.56260.54910.58120.53220.55010.56540.52910.51390.53440.50650.49310.5055
3 0.48080.46840.47700.58980.53350.56960.51270.52890.53910.50080.48610.50210.47310.44310.4645
6 0.43060.39750.39720.49060.51700.53460.47870.50060.50150.45460.43790.45350.44040.37870.3956
1 0.38590.33870.33120.46890.50320.49720.43770.47000.46420.40840.39840.41110.40530.32040.3235

of three simulated return pairs and real data.

Hurst exponent describes the persistence of
autocorrelation in a separately analyzed time
series. If Hurst exponent h(2) > 0.5, the system
exhibits persistent properties; if h(2) < 0.5, it is
anti-persistent. But for the cross-correlation
exponent, it only describes the exponent of
power-law relationship when q = 2. From the
table, we can find that the exponents h(2) for the
individual return of l = 120, l = 125 and r = 3.0 are
slightly larger than 0.5, indicating very weak
persistent property, while the exponents h(2) for
the individual return of r = 4.3, HSI and PAB are
slightly smaller than 0.5, implying very weak anti-
persistent property. Meanwhile, h(2) values for found that the cross-correlation exponent is equal
the individual return of l = 4.5, r = 2.8, SSE and to the average of individual Hurst exponents for
SPD are very close to 0.5, which is an indication of two fractionally autoregressive integrated
almost no persistent property. In addition, moving average processes having identical
random noise when q = 2. And for two time series
Podobnik and Stanley [2008], Podobnik et al.
which are constructed by binomial measure from
[2009]
p-model, there exists the following relationship
hxy(q) = [hxx(q) + hyy(q)]/2. The average of
generalized Hurst exponents, which are the
average of the separately considered return
series in both Chinese markets and the financial
price model, are also calculated and shown in Fig.
6. In the empirical research of the return time
series, the cross-correlation exponent is less than
the averaged generalized Hurst exponents when
q < 0 and greater than the generalized Hurst
exponents when q > 0.

1630004-12
 Nonlinear Analysis on Cross-Correlation of Financial Time Series

Figure 7 shows the plots of the multifractal 0.8

exponents τxy(q) of three cases of simulated 0.6 0

return

−0.2
(a) (b)

Fig. 5. (a) The exponents hxy(q) (multifractal exponents τxy(q) in

the

inset) and (b) multifractal spectrum fxy(α) of returns for simulated data pairs, SSE and HSI, SPD and PAB.
0.8
0.75

0.7 0.7

0.65

0.5 0.4
0.45
0.3
0.4

(a) (b)

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 H. L. Niu & J. Wang

by UNIVERSITY OF CALIFORNIA @ SAN DIEGO on 03/21/16. For personal use only.

Int. J. Bifurcation Chaos 2016.26. Downloaded from www.worldscientific.com

0.85
0.7 0.8

0.75
0.6

0.4
0.55

0.5
0.3 0.45

(c) (d)

0.7

1630004-14
 Nonlinear Analysis on Cross-Correlation of Financial Time Series

0.6

0.4

0.3
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(e)

Fig. 6. The exponents h(q) of returns for the simulation data, SSE and HSI, SPD and PAB.
Table 2. Hurst exponents h(2) of returns for the simulation and there also exists the multifractality for these
data, SSE and HSI, SPD and PAB. two time series individually. We can also obtain
similar results for the parameter sets l = 120
4
λ =4 . 5
2 λ =4 . 3
5 0.4969 0.4909 0.4999 Cross
λ = 4.3, l = 120, r = 2.5 0.4508 0.4441 0.4625 0
Cross 0.4958 0.4904 0.5019
λ = 4.0, l = 120, r = 2.5 0.5473 0.5552 0.5563 −2
q)
τ(
λ = 4.0, l = 125, r = 2.5 0.5345 0.5376 0.5350
−4
Cross 0.5626 0.5814 0.5767
λ = 3.5, l = 125, r = 2.8 0.5069 0.5198 0.5313 −6
λ = 3.5, l = 125, r = 3.0 0.5135 0.5241 0.5309
Cross 0.5226 0.5392 0.5522 −8

SSE 0.5042 0.5013 0.5148

−10
HSI 0.4806 0.4607 0.4741 −10 −5 0 5 10
Cross 0.5154 0.5035 0.5191 q
SPD 0.4900 0.4919 0.4820 and l = 125, r = 2.8 and r = 3.0, {λ = 4.4,l = 130}
PAB 0.4514 0.4289 0.4503
Cross 0.4875 0.4675 0.4857
and {λ = 4.8,l = 125}, {l = 125,r = 2.8}

and {l = 130,r = 3.0}, {λ = 4.0,r = 2.3} and {λ = 4.3,r

pairs and real data for the polynomial order n = 3,
at the same time in comparison with
corresponding exponents τ(q) of individual
return series. τxy values of all the simulated return
pairs can be observed in one plot, see the inset of
Fig. 5(a). These plots exhibit that τ is nonlinearly
dependent on q, which provides the empirical
evidence that multifractality exists in different
pairs of return time series as well as individual
ones in this study. More specifically, there is
multifractality of the cross-correlation for the
pair return time series with λ = 4.3 and λ = 4.5,
= 2.1}, {λ = 3.8,l = 120,r = 2.5} and {λ = 3.5,l =
130,r = 3.0}, SSE and HSI, SPD and PAB.
Next we investigate the multifractal strength
by the methods of multifractal spectra as defined
in Sec. 3.2, the empirical results for the
polynomial order n = 3 are given in Fig. 8 and
Table 3. It is known that the multifractal
spectrum of monofractality is a point, that is, the
width of multifractal spectrum is zero if this
system is monofractal. Figure 5(b) shows the
multifractal spectrum fxy(α) of all the return pairs.

1630004-15
H. L. Niu & J. Wang

Actually, the width of multifractal spectrum can further explore the fractal asymmetry of the
be regarded as an estimate of multifractal analyzed time
strength. The widths of multifractal spectra α are series. Figure 8 gives a direct illustration of
displayed in Table 3. We can see the widths of and , while Table 3 presents their calculated
cross-correlation multifractal spectral for the
return time series and the individual return time 4
l =120
series are significantly nonzero, which imply that 2 l =125
there is a clear deviation from random walk Cross
process for either individual or cross-correlated 0

return time series. From α values, we find that −2

return pair of λ = 4.5 and λ = 4.3 (Simu1) has the q)
strongest cross-correlation multifractality in this τ( −4

study. The multifractal strength for return pair of

−
l = 120 and l = 125 (Simu2), {λ = 4.0,r = 2.3} and 6
{λ = 4.3,r = 2.1} (Simu6), {λ = 3.8,l = 120,r = 2.5}
and {λ = 3.5,l = 130,r = 3.0} (Simu7) are weaker −
8
−10
with respect to those of other four cases. We −10 −5 0 5 10
q
(a) (b)

Fig. 7. The exponents τ(q) of returns for the simulation data, SSE and HSI, SPD and PAB.

1630004-16
 Nonlinear Analysis on Cross-Correlation of Financial Time Series

−10 −5 0 5 10 −5 0 5 10 q q
(c) (d)

4
SPD
PAB
Cross

−2
q)
τ( −4

−10
−10 −5 0 5 10
q

−6

−8

(e)

1630004-17
 H. L. Niu & J. Wang
Fig. 7.
values and fractal asymmetric statistics
and FAE, respectively. It is observable in the table
that all the magnitude of FAE values deviate from
0, indicating the existence of fractal asymmetry in
these data series. Take the return series
by UNIVERSITY OF CALIFORNIA @ SAN DIEGO on 03/21/16. For personal use only.
and l = 125 for example, both individual return
series
Int. J. Bifurcation are Downloaded
Chaos 2016.26. fractalfrom www.worldscientific.com
right-asymmetric
while the cross-correlated return
pair is fractal leftasymmetric (
3.4. Further multiple analysis
In this section, we demonstrate more colorful
multifractal cross-correlation behaviors of the
simulated return pairs from the price model. In
Figs. 9(a)– 9(c), we consider one simulated return
of parameter set {λ = 0.85,l = 125,r = 1}, and
(a)
(Continued)
another return of fixed {l = 125,r = 1} and varying
λ ∈ [0.35,4.0] with 05. For r = 1 in R2, we
have 0.174 < λc < 0.843 [Meester & Roy, 1996;
Wang et al., 2015]. Here, we consider the cases of
of l = 120
λ from around λc to much larger than λc. It is
observed that the hxy(q) and τxy(q) of return pairs
( for different λ are nonlinearly dependent on q
with various degrees. The ranges of their values’
variation can be obviously seen in Fig. 9(b).
Figure 9(c) shows the multiple behaviors of
multifractal spectrum for varying values of λ. The
f(α) is not a point but a distribution of α. All these
provide evidence that when we fix the parameter
r and l, the analyzed simulated return pairs with
the changing value of parameter λ have the
multifractal cross-correlation properties. Figures
9(d)–9(f) display the empirical results of
1
1
0.8
0.8
0.6
−0.2
(b)
0.8
0.6
1630004-18
 Nonlinear Analysis on Cross-Correlation of Financial Time Series

−0.2

−0.4
0.4 0.5 0.6 0.7 0.8 0.9 1
α
(c) (d)

0.8

0.6

−0.2

(e)

Fig. 8. The multifractal spectra f(α) of returns for the simulation data, SSE and HSI, SPD and PAB.

1630004-19
 H. L. Niu & J. Wang

Table 3. Multifractal strength and fractal asymmetric statistics for the analyzed return time series.
Data αl αr α FAE

λ =4 . 5, l =120 , r =2 . 5 0.2893 0.3676 0.6569 − 0. 1191

by UNIVERSITY OF CALIFORNIA
λ
=4@ SAN . l
3, =120
DIEGO, on=2 5 r
03/21/16.
. 0.4419
For personal use only. 0.2466 0.6885 0. 2837
Cross 0.3043 0.2126 0.516 0.1775
8
Int. J. Bifurcation Chaos 2016.26. Downloaded from www.worldscientific.com
λ 0.2780 0.2951 0.573
0.1869 0.3008 1
= 0.1453 0.1385 0.487
7
4 0.283
. 8
0
,

1
2
0
,

2
.
5

4
.
0
,

1
2
5

1630004-20
 Nonlinear Analysis on Cross-Correlation of Financial Time Series

2
.
5
Cross
λ = 3.5, l 0.2391 0.2309 0.469 0.0175
= 125, r 9
= 2.8
λ = 3.5, l 0.2371 0.3867 0.623
= 125, r 0.2309 0.2350 8
= 3.0 0.465
Cross 9
λ 0.3427 0.3595 0.702
0.2565 0.4602 2
= 0.2630 0.2066 0.716
6
4 0.469
. 5
4
,

1
3
0
,

2
.
5

4
.

1630004-21
H. L. Niu & J. Wang

8
,

1
2
5
,

2
.
5
Cross
λ 0.2114 0.5271 0.738
0.2189 0.4016 5
= 0.1635 0.3139 0.620
5
4 0.477
. 4
3
,

1
2
5
,

2
.
8

1630004-22
 Nonlinear Analysis on Cross-Correlation of Financial Time Series

4
.
3
,

1
3
0
,

3
.
0
Cross
λ 0.2634 0.3324 0.595
0.2461 0.3716 8
= 0.1430 0.2375 0.617
7
4 0.380
. 4
0
,

1
3
0
,

2
.
3

1630004-23
H. L. Niu & J. Wang

4
.
3
,

1
3
0
,

2
.
1
Cross
λ 0.3280 0.3350 0.663
0.1835 0.3708 0
= 0.1030 0.2128 0.554
3
3 0.315
. 8
8
,

1
2
0
,

1630004-24
 Nonlinear Analysis on Cross-Correlation of Financial Time Series

.
5

3
.
5
,

1
3
0
,

3
.
0
Cross
SSE 0.2554 0.1956 0.451 0.1324
0
HSI 0.3922 0.3403 0.732 0.0709
5
Cross 0.2016 0.2334 0.435 −0.0732
0
SPD 0.3 0.2 0.6
PAB 31 95 26
4 4 8
0.3 0.2 0.6
97 71 69
7 5 2
Cross 0.3138 0.1981 0.511 0.2261
9

1630004-25
 H. L. Niu & J. Wang

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Int. J. Bifurcation Chaos 2016.26. Downloaded from www.worldscientific.com

(a) (b)

0.8

0.2

0.8 0.35

(c) (d)

1630004-26
 Nonlinear Analysis on Cross-Correlation of Financial Time Series

(e) (f)

Fig. 9. The multifractal statistics hxy(q), τxy(q) and fxy(α) of simulated return pairs with varying λ, l and r respectively.
0.7

0.4

0.3

(g) (h)

1630004-27
 H. L. Niu & J. Wang
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0.8
0.2
0
0.2
Fig. 9.
parameter set of {λ = 0.85,r = 2.5,l = 135} and
another of {λ = 0.85,r = 2.5} with varying l ∈
= 5). In Figs. 9(g)–9(i), we consider
one return series of {λ = 0.85,l = 125,r = 3.5} and
another return series of varying r ∈ [1.0,4.5] for
05. We see that the simulation return pairs
all show the existence of multifractality of their
cross-correlation relationship. Meanwhile it seems
that the value ranges of hxy(q) for varying r [in the
left-upper of Fig. 9(h)] are narrower than those for
varying λ and l respectively [in Figs. 9(b) and 9(e)].
4. Conclusion
In the present paper, we investigate the
crosscorrelation relationship and multifractality
between two return time series for a financial
price model. This financial model is developed by
1630004-28
(i)
(Continued)
the continuum percolation system, in which we
treat the connective cluster of continuum
percolation as the cluster of traders sharing the
same opinion about the market. In the empirical
research, the daily returns of two Chinese stock
market indexes SSE and HSI, two liquid stocks SPD
and PAB are also analyzed for comparison. The
empirical results show that there exist cross-
correlations in all the pairs of return time series,
and the cross-correlation between SSE and HSI
seems stronger than that between two time return
series of the model. Further, we apply MF-DCCA
method to investigate the multifractal behaviors of
the returns. We show that each pair of return
series is power-law cross-correlated, and the
corresponding multifractality is significant in all
cross-correlation relationships both for the real
stock markets and the price model. By the
statistical analysis, it suggests that the financial

price model of the present paper, to some extent, is
reasonable for real stock markets.
Acknowledgments
by UNIVERSITY OF CALIFORNIA @ SAN DIEGO on 03/21/16. For personal use only.
The authors were supported by the Fundamental
Int. J. Bifurcation Chaos 2016.26. Downloaded from www.worldscientific.com
Research Funds for the Central Universities No.
2014YJS134, and by National Natural Science
Foundation of China Grant Nos. 71271026 and
10971010.
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