A persistent-homology-based turbulence index & some applications of TDA on financial markets

Miguel A. Ruiz-Ortiz, Jos\'e Carlos G\'omez-Larra\~naga and Jes\'us Rodr\'iguez-Viorato

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Abstract: Topological Data Analysis (TDA) is a modern approach to Data Analysis focusing on the topological features of data; it has been widely studied in recent years and used extensively in Biology, Physics, and many other areas. However, financial markets have been studied slightly through TDA. Here we present a quick review of some recent applications of TDA on financial markets, including applications in the early detection of turbulence periods in financial markets and how TDA can help to get new insights while investing. Also, we propose a new turbulence index based on persistent homology -- the fundamental tool for TDA -- that seems to capture critical transitions in financial data; we tested our index with different financial time series (S&P500, Russel 2000, S&P/BMV IPC and Nikkei 225) and crash events (Black Monday crash, dot-com crash, 2007-08 crash and COVID-19 crash). Furthermore, we include an introduction to persistent homology so the reader can understand this paper without knowing TDA.

Date: 2022-03, Revised 2023-07
New Economics Papers: this item is included in nep-rmg
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