Dynamics of cluster structures in a financial market network

Anton Kocheturov, Mikhail Batsyn () and Panos M. Pardalos

Physica A: Statistical Mechanics and its Applications, 2014, vol. 413, issue C, 523-533

Abstract: In the course of recent fifteen years the network analysis has become a powerful tool for studying financial markets. In this work we analyze stock markets of the USA and Sweden. We study cluster structures of a market network constructed from a correlation matrix of returns of the stocks traded in each of these markets. Such cluster structures are obtained by means of the P-Median Problem (PMP) whose objective is to maximize the total correlation between a set of stocks called medians of size p and other stocks. Every cluster structure is an undirected disconnected weighted graph in which every connected component (cluster) is a star, or a tree with one central node (called a median) and several leaf nodes connected with the median by weighted edges. Our main observation is that in non-crisis periods of time cluster structures change more chaotically, while during crises they show more stable behavior and fewer changes. Thus an increasing stability of a market graph cluster structure obtained via the PMP could be used as an indicator of a coming crisis.

Keywords: Dynamics; Financial markets; P-Median Problem; Clustering; Crisis (search for similar items in EconPapers)
Date: 2014
References: View complete reference list from CitEc
Citations: View citations in EconPapers (17)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:phsmap:v:413:y:2014:i:c:p:523-533

DOI: 10.1016/j.physa.2014.06.077

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