Stock market networks: The dynamic conditional correlation approach

Štefan Lyócsa, Tomáš Výrost and Eduard Baumohl

Physica A: Statistical Mechanics and its Applications, 2012, vol. 391, issue 16, 4147-4158

Abstract: We demonstrate the economic relevance of minimum spanning trees (MSTs) constructed from dynamic conditional correlations (DCC) for a sample of S&P 100 constituents. An empirical comparison of MST properties shows that using the standard approach of rolling (or sliding-window) correlations yields trees that are more robust, have higher densities and exhibit higher industry clustering than MSTs based on DCC. Our results suggest that these properties are achieved at the expense of the smoothing of market dynamics, which is better preserved by DCC. The DCC approach offers a new perspective for the analysis of complex systems such as stock markets.

Keywords: Stock market networks; Minimum spanning trees; Dynamic conditional correlations; Rolling correlations (search for similar items in EconPapers)
Date: 2012
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Citations: View citations in EconPapers (23)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:phsmap:v:391:y:2012:i:16:p:4147-4158

DOI: 10.1016/j.physa.2012.03.038

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