Causal Discovery in Financial Markets: A Framework for Nonstationary Time-Series Data

Abstract

This paper introduces a new causal structure learning method for nonstationary time series data, a common data type found in fields such as finance, economics, healthcare, and environmental science. Our work builds upon the constraint-based causal discovery from nonstationary data algorithm (CD-NOD). We introduce a refined version (CD-NOTS) which is designed specifically to account for lagged dependencies in time series data. We compare the performance of different algorithmic choices, such as the type of conditional independence test and the significance level, to help select the best hyperparameters given various scenarios of sample size, problem dimensionality, and availability of computational resources. Using the results from the simulated data, we apply CD-NOTS to a broad range of real-world financial applications in order to identify causal connections among nonstationary time series data, thereby illustrating applications in factor-based investing, portfolio diversification, and comprehension of market dynamics.