Uncovering networks amongst stocks returns by studying nonlinear interactions in high frequency data of the Indian Stock Market using mutual information

Charu Sharma and Amber Habib

Papers from arXiv.org

Abstract: In this paper, we explore the detection of clusters of stocks that are in synergy in the Indian Stock Market and understand their behaviour in different circumstances. We have based our study on high frequency data for the year 2014. This was a year when general elections were held in India, keeping this in mind our data set was divided into 3 subsets, pre-election period: Jan-Feb 2014; election period: Mar-May 2014 and :post-election period: Jun-Dec 2014. On analysing the spectrum of the correlation matrix, quite a few deviations were observed from RMT indicating a correlation across all the stocks. We then used mutual information to capture the non-linearity of the data and compared our results with widely used correlation technique using minimum spanning tree method. With a larger value of power law exponent {\alpha}, corresponding to distribution of degrees in a network, the nonlinear method of mutual information succeeds in establishing effective network in comparison to the correlation method. Of the two prominent clusters detected by our analysis, one corresponds to the financial sector and another to the energy sector. The financial sector emerged as an isolated, standalone cluster, which remain unaffected even during the election periods.

Date: 2019-02
New Economics Papers: this item is included in nep-mst
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