Question

Understanding correlations in complex systems is crucial in the face of turbulence, such as the financial crisis of 2008. However, in complex systems such as financial systems, correlations are not constant but instead vary in time” (Preis, Kenett, Stanley, Helbing, & Ben-Jacob, 2012). In this module, we are moving back to the stock market. Reliable estimates of correlations are necessary to protect a portfolio. Looking at the last quarter of 2008, do you see any patterns between consumer confidence and the Dow Jones Industrial Average (DJIA)?

Answer 1

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Question:

Answer:

Data of Consumer Confidence and the Dow Jones Industrial Average (DJIA) (the last quarter of 2008).

Note: consumer confidence in the USA is measured by Consumer Confidence Index(CCI).

Month (year - 2008)	CCI	DJIA
September	97.84	12782.08
October	97.59	11096.70
November	97.36	10718.45
December	97.23	10759.85

% Change in CCI (Sept-Oct) = (97.59 -97.84)/97.84 = -0.25%

% Change in CCI (Oct-Nov) = (97.36 -97.59)/97.59 = -0.23%

% Change in CCI (Nov-Dec) = (97.23 -97.36)/97.36 = -0.13%

% Change in DJIA (Sept-Oct) = (11096.70 -12782.08)/12782.08= -13.18%

% Change in DJIA (Oct-Nov) = (10718.45 -11096.70)/11096.70= -3.40%

% Change in DJIA (Nov-Dec) = (10759.85 -10718.45)/10718.45 = +0.38%

Here, we can see here that the CCI or consumer confidence and the Dow Jones Industrial Average (DJIA) moved together in the similar direction. During Sep-2008 to Dec-2008 CCI was negative but its improved every month. Similarly Dow Jones Industrial Average (DJIA) has negative growth from Sep-2008 to Oct-2008 and Oct-2008 to Nov-2008 and grown positive during Nov-2008 to Dec-2008 and improved every month. But here we can also see that the growth rate or movement rate of DJIA is greater than CCI.

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