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Application of a New Quantitative Approach to Stock Markets: Minimum Spanning Tree

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  • Veysel Fuat Hatipoğlu

Abstract

The systems involving interacting agents such as food networks, scientific citations, social networks, communication networks, the Internet, and the companies interacting in stock portfolios have long been studied by many researchers under the concept of complex systems. Such systems are expressed in terms of weighted networks. The dense connections and entwined relations amongst the agents play important roles for forecasting or risk analysis. In this study we present a novel approach to determine hierarchical structure of Industrial sector in the globally operating stock market network. By using the subdominant ultra-metric topology emerge from the minimum spanning tree of the stock market network; it becomes possible to extract the important properties of this complex system. Moreover, we use the dynamic time warping distance to determine the taxonomy and to measure similarity between time series of the operating Industrial sectors. It is found that United States, United Kingdom, Netherlands and Denmark are the most dominant stock exchanges in Industrials sector. We also find three hierarchical clusters and then topologically analyze the structure of considered clusters.

Suggested Citation

  • Veysel Fuat Hatipoğlu, 2016. "Application of a New Quantitative Approach to Stock Markets: Minimum Spanning Tree," Alphanumeric Journal, Bahadir Fatih Yildirim, vol. 5(1), pages 163-169, June.
    • Handle: RePEc:anm:alpnmr:v:5:y:2016:i:1:p:163-169
    DOI: http://dx.doi.org/10.17093/alphanumeric.323988
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    References listed on IDEAS

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    1. Wang, Gang-Jin & Xie, Chi & Han, Feng & Sun, Bo, 2012. "Similarity measure and topology evolution of foreign exchange markets using dynamic time warping method: Evidence from minimal spanning tree," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 391(16), pages 4136-4146.
    2. R. Mantegna, 1999. "Hierarchical structure in financial markets," The European Physical Journal B: Condensed Matter and Complex Systems, Springer;EDP Sciences, vol. 11(1), pages 193-197, September.
    3. Jaroslaw Kwapien & Sylwia Gworek & Stanislaw Drozdz, 2009. "Structure and evolution of the foreign exchange networks," Papers 0901.4793, arXiv.org.
    4. Miccichè, Salvatore & Bonanno, Giovanni & Lillo, Fabrizio & N. Mantegna, Rosario, 2003. "Degree stability of a minimum spanning tree of price return and volatility," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 324(1), pages 66-73.
    5. Jang, Wooseok & Lee, Junghoon & Chang, Woojin, 2011. "Currency crises and the evolution of foreign exchange market: Evidence from minimum spanning tree," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 390(4), pages 707-718.
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    More about this item

    Keywords

    Dynamic Time Warping; Hierarchical Clustering; Minimum Spanning Tree; Stock Exchanges; Topology Evolution;
    All these keywords.

    JEL classification:

    • C38 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Classification Methdos; Cluster Analysis; Principal Components; Factor Analysis
    • C63 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computational Techniques

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