What is the index cohesive force?

The index cohesive force (ICF) is a concept developed by Dror Y Kennet and his Ph.D. Supervisor Eschel Ben-Jacob. It was introduced as a new calculable measure of the index effect on the financial market. It's described as a parity between raw stock correlations and residual stock correlations after discounting the index effect.

Where have you heard about the index cohesive force?

In recent years the ICF was used to research the time dynamics of the S&P500. The investigation highlighted a speedy and dramatic move at the end of 2001, from a very strong and healthy market into a weak and abnormal market. This shows the presence of a very strong index cohesive force and is a common sign of over dominance of the index.

What you need to know about the index cohesive force.

This model aims to provide a way to determine structural shifts in the market, which means it can be susceptible to fundamental collapse. Higher amounts of the ICF means that the index will mainly affect market dynamics, therefore high values of ICF correspond to states where the market index dominates the behaviour of the market.

The recent research of the S&P500 showed common signs of over-dominance of the index – likely a consequence of the USA’s drastic cuts to interest rates, a technique used to overcome the fallout effect of the dot com bubble collapse.

Find out more about the index cohesive force.

To find out how the ICF can be effected, see our page on the dot com bubble collapse.