Friendship of Stock Market Indices: A Cluster-Based Investigation of Stock Markets

László Nagy and Mihály Ormos
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László Nagy: Department of Finance, Budapest University of Technology and Economics, Magyar tudosok krt. 2., 1117 Budapest, Hungary

JRFM, 2018, vol. 11, issue 4, 1-16

Abstract: This paper introduces a spectral clustering-based method to show that stock prices contain not only firm but also network-level information. We cluster different stock indices and reconstruct the equity index graph from historical daily closing prices. We show that tail events have a minor effect on the equity index structure. Moreover, covariance and Shannon entropy do not provide enough information about the network. However, Gaussian clusters can explain a substantial part of the total variance. In addition, cluster-wise regressions provide significant and stationer results.

Keywords: cluster analysis; equity index networks; machine learning (search for similar items in EconPapers)
JEL-codes: C E F2 F3 G (search for similar items in EconPapers)
Date: 2018
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Citations: View citations in EconPapers (4)

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