Correlation Structures and Regime Shifts in Nordic Stock Markets

2025/12/31 by Maksym A. Girnyk · 1 voice
Economics, Econometrics and Finance · #q-fin.PM

paper · pdf · doi:10.1080/1350486x.2026.2671729

Abstract

Financial markets are complex adaptive systems characterized by collective behavior and abrupt regime shifts, particularly during crises. This paper studies time-varying dependencies in Nordic equity markets and examines whether correlation-eigenstructure dynamics can be exploited for regime-aware portfolio construction. Using two decades of daily data for the OMXS30, OMXC20, and OMXH25 universes, pronounced regime dependence in rolling correlation matrices is documented: crisis episodes are characterized by sharp increases in the leading eigenvalue and counter-cyclical behavior in the second eigenvalue. Eigenportfolio regressions further support a market-factor interpretation of the dominant eigenmode. Building on these findings, an adaptive portfolio allocation framework is proposed, combining correlation-matrix cleaning, an eigenvalue-ratio crisis indicator and long-only minimum-variance optimization with constraints that bound exposures to dominant eigenmodes. Backtesting results indicate improved downside protection and risk-adjusted performance during stress regimes, while remaining competitive with state-of-the-art benchmarks in tranquil periods.

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Discussions

• Maksym A. Girnyk: Correlation Structures and Regime Shifts in Nordic Stock Markets https://arxiv.org/abs/2601.06090 https://arxiv.org/pdf/2601.06090 https://arxiv.org/html/2601.06090 [bsky, 0 points, 0 comments]

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