Correlation, hierarchies, and networks in financial markets

M. Tumminello, F. Lillo and Rosario Mantegna

Papers from arXiv.org

Abstract: We discuss some methods to quantitatively investigate the properties of correlation matrices. Correlation matrices play an important role in portfolio optimization and in several other quantitative descriptions of asset price dynamics in financial markets. Specifically, we discuss how to define and obtain hierarchical trees, correlation based trees and networks from a correlation matrix. The hierarchical clustering and other procedures performed on the correlation matrix to detect statistically reliable aspects of the correlation matrix are seen as filtering procedures of the correlation matrix. We also discuss a method to associate a hierarchically nested factor model to a hierarchical tree obtained from a correlation matrix. The information retained in filtering procedures and its stability with respect to statistical fluctuations is quantified by using the Kullback-Leibler distance.

Date: 2008-09
References: View references in EconPapers View complete reference list from CitEc
Citations:

Published in J. Econ. Behav. Organ. 75, pp. 40-58 (2010)

Downloads: (external link)
http://arxiv.org/pdf/0809.4615 Latest version (application/pdf)

Related works:
Journal Article: Correlation, hierarchies, and networks in financial markets (2010)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:arx:papers:0809.4615

Access Statistics for this paper

More papers in Papers from arXiv.org
Bibliographic data for series maintained by arXiv administrators ().