Robustness of Sign Correlation in Market Network Analysis

Grigory A. Bautin (), Alexander P. Koldanov () and Panos M. Pardalos
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Grigory A. Bautin: National Research University Higher School of Economics, Laboratory LATNA
Alexander P. Koldanov: National Research University Higher School of Economics, Laboratory LATNA
Panos M. Pardalos: National Research University Higher School of Economics, Laboratory LATNA

A chapter in Network Models in Economics and Finance, 2014, pp 25-33 from Springer

Abstract: Abstract Financial market can be modeled as network represented by a complete weighted graph. Different characteristics of this graph (minimum spanning tree, market graph, and others) give an important information on the network. In the present paper it is studied how the choice of measure of similarity between stocks influences the statistical errors in the calculation of network characteristics. It is shown that sign correlation is a robust measure of similarity in contrast with Pearson correlation widely used in market network analysis. This gives a possibility to get more precise information on stock market from observations.

Keywords: Pearson Correlation; Minimum Span Tree; Sample Sign; Heavy Tail; Mixture Distribution (search for similar items in EconPapers)
Date: 2014
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DOI: 10.1007/978-3-319-09683-4_3

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