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A network perspective of the stock market

Chi Tse, Jing Liu and Francis C.M. Lau

Journal of Empirical Finance, 2010, vol. 17, issue 4, 659-667

Abstract: Complex networks are constructed to study correlations between the closing prices for all US stocks that were traded over two periods of time (from July 2005 to August 2007; and from June 2007 to May 2009). The nodes are the stocks, and the connections are determined by cross correlations of the variations of the stock prices, price returns and trading volumes within a chosen period of time. Specifically, a winner-take-all approach is used to determine if two nodes are connected by an edge. So far, no previous work has attempted to construct a full network of US stock prices that gives full information about their interdependence. We report that all networks based on connecting stocks of highly correlated stock prices, price returns and trading volumes, display a scalefree degree distribution. The results from this work clearly suggest that the variation of stock prices are strongly influenced by a relatively small number of stocks. We propose a new approach for selecting stocks for inclusion in a stock index and compare it with existing indexes. From the composition of the highly connected stocks, it can be concluded that the market is heavily dominated by stocks in the financial sector.

Keywords: Stock; market; Complex; network; Degree; distribution; Stock; indexes (search for similar items in EconPapers)
Date: 2010
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Journal of Empirical Finance is currently edited by R. T. Baillie, F. C. Palm, Th. J. Vermaelen and C. C. P. Wolff

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