EconPapers    
Economics at your fingertips  
 

Loss of structural balance in stock markets

Eva Ferreira (), Susan Orbe, J. Ascorbebeitia, Brais Álvarez Pereira () and E. Estrada
Additional contact information
J. Ascorbebeitia: Department of Economic Analysis, University of the Basque Country UPV/EHU
E. Estrada: Institute of Mathematics and Applications, University of Zaragoza, ARAID Foundation. Institute for Cross-Disciplinary Physics and Complex Systems

Papers from arXiv.org

Abstract: We use rank correlations as distance functions to establish the interconnectivity between stock returns, building weighted signed networks for the stocks of seven European countries, the US and Japan. We establish the theoretical relationship between the level of balance in a network and stock predictability, studying its evolution from 2005 to the third quarter of 2020. We find a clear balance-unbalance transition for six of the nine countries, following the August 2011 Black Monday in the US, when the Economic Policy Uncertainty index for this country reached its highest monthly level before the COVID-19 crisis. This sudden loss of balance is mainly caused by a reorganization of the market networks triggered by a group of low capitalization stocks belonging to the non-financial sector. After the transition, the stocks of companies in these groups become all negatively correlated between them and with most of the rest of the stocks in the market. The implied change in the network topology is directly related to a decrease in stocks predictability, a finding with novel important implications for asset allocation and portfolio hedging strategies.

Date: 2021-04
New Economics Papers: this item is included in nep-cwa, nep-fmk, nep-net and nep-rmg
References: View references in EconPapers View complete reference list from CitEc
Citations: Track citations by RSS feed

Downloads: (external link)
http://arxiv.org/pdf/2104.06254 Latest version (application/pdf)

Related works:
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:2104.06254

Access Statistics for this paper

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

 
Page updated 2022-08-09
Handle: RePEc:arx:papers:2104.06254