IDEAS home Printed from https://ideas.repec.org/a/eee/phsmap/v419y2015icp108-114.html
   My bibliography  Save this article

Optimality problem of network topology in stocks market analysis

Author

Listed:
  • Djauhari, Maman Abdurachman
  • Gan, Siew Lee

Abstract

Since its introduction fifteen years ago, minimal spanning tree has become an indispensible tool in econophysics. It is to filter the important economic information contained in a complex system of financial markets’ commodities. Here we show that, in general, that tool is not optimal in terms of topological properties. Consequently, the economic interpretation of the filtered information might be misleading. To overcome that non-optimality problem, a set of criteria and a selection procedure of an optimal minimal spanning tree will be developed. By using New York Stock Exchange data, the advantages of the proposed method will be illustrated in terms of the power-law of degree distribution.

Suggested Citation

  • Djauhari, Maman Abdurachman & Gan, Siew Lee, 2015. "Optimality problem of network topology in stocks market analysis," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 419(C), pages 108-114.
    • Handle: RePEc:eee:phsmap:v:419:y:2015:i:c:p:108-114
    DOI: 10.1016/j.physa.2014.09.060
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S037843711400836X
    Download Restriction: Full text for ScienceDirect subscribers only. Journal offers the option of making the article available online on Science direct for a fee of $3,000
    File URL: https://libkey.io/10.1016/j.physa.2014.09.060?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Tola, Vincenzo & Lillo, Fabrizio & Gallegati, Mauro & Mantegna, Rosario N., 2008. "Cluster analysis for portfolio optimization," Journal of Economic Dynamics and Control, Elsevier, vol. 32(1), pages 235-258, January.
    2. Djauhari, Maman A., 2012. "A robust filter in stock networks analysis," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 391(20), pages 5049-5057.
    3. Stephen A. Ross, 2013. "The Arbitrage Theory of Capital Asset Pricing," World Scientific Book Chapters, in: Leonard C MacLean & William T Ziemba (ed.), HANDBOOK OF THE FUNDAMENTALS OF FINANCIAL DECISION MAKING Part I, chapter 1, pages 11-30, World Scientific Publishing Co. Pte. Ltd..
    4. Pawe{l} Sieczka & Janusz A. Ho{l}yst, 2008. "Correlations in commodity markets," Papers 0803.3884, arXiv.org, revised Jan 2009.
    5. 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.
    6. 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.
    7. Szabó, Gábor J. & Alava, Mikko & Kertész, János, 2003. "Geometry of minimum spanning trees on scale-free networks," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 330(1), pages 31-36.
    8. 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.
    9. G. Bonanno & G. Caldarelli & F. Lillo & S. Micciché & N. Vandewalle & R. Mantegna, 2004. "Networks of equities in financial markets," The European Physical Journal B: Condensed Matter and Complex Systems, Springer;EDP Sciences, vol. 38(2), pages 363-371, March.
    10. Oh, Gabjin, 2014. "Grouping characteristics of industry sectors in financial markets," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 395(C), pages 261-268.
    11. Michael C. Munnix & Takashi Shimada & Rudi Schafer & Francois Leyvraz Thomas H. Seligman & Thomas Guhr & H. E. Stanley, 2012. "Identifying States of a Financial Market," Papers 1202.1623, arXiv.org.
    12. Galazka, Marek, 2011. "Characteristics of the Polish Stock Market correlations," International Review of Financial Analysis, Elsevier, vol. 20(1), pages 1-5, January.
    13. Yiting Zhang & Gladys Hui Ting Lee & Jian Cheng Wong & Jun Liang Kok & Manamohan Prusty & Siew Ann Cheong, 2010. "Will the US Economy Recover in 2010? A Minimal Spanning Tree Study," Papers 1009.5800, arXiv.org, revised Dec 2010.
    14. Ulusoy, Tolga & Keskin, Mustafa & Shirvani, Ayoub & Deviren, Bayram & Kantar, Ersin & Çaǧrı Dönmez, Cem, 2012. "Complexity of major UK companies between 2006 and 2010: Hierarchical structure method approach," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 391(21), pages 5121-5131.
    15. Coelho, Ricardo & Gilmore, Claire G. & Lucey, Brian & Richmond, Peter & Hutzler, Stefan, 2007. "The evolution of interdependence in world equity markets—Evidence from minimum spanning trees," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 376(C), pages 455-466.
    16. Cieslik, Dietmar, 2000. "The vertex degrees of minimum spanning trees," European Journal of Operational Research, Elsevier, vol. 125(2), pages 278-282, September.
    17. Jung, Woo-Sung & Chae, Seungbyung & Yang, Jae-Suk & Moon, Hie-Tae, 2006. "Characteristics of the Korean stock market correlations," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 361(1), pages 263-271.
    18. Garas, Antonios & Argyrakis, Panos, 2007. "Correlation study of the Athens Stock Exchange," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 380(C), pages 399-410.
    19. Brida, Juan Gabriel & Risso, Wiston Adrián, 2008. "Multidimensional minimal spanning tree: The Dow Jones case," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 387(21), pages 5205-5210.
    20. 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.
    21. Djauhari, Maman Abdurachman & Gan, Siew Lee, 2013. "Minimal spanning tree problem in stock networks analysis: An efficient algorithm," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 392(9), pages 2226-2234.
    22. Zhang, Yiting & Lee, Gladys Hui Ting & Wong, Jian Cheng & Kok, Jun Liang & Prusty, Manamohan & Cheong, Siew Ann, 2011. "Will the US economy recover in 2010? A minimal spanning tree study," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 390(11), pages 2020-2050.
    23. Tabak, Benjamin M. & Serra, Thiago R. & Cajueiro, Daniel O., 2010. "Topological properties of stock market networks: The case of Brazil," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 389(16), pages 3240-3249.
    24. Sieczka, Paweł & Hołyst, Janusz A., 2009. "Correlations in commodity markets," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 388(8), pages 1621-1630.
    25. Mizuno, Takayuki & Takayasu, Hideki & Takayasu, Misako, 2006. "Correlation networks among currencies," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 364(C), pages 336-342.
    26. Zeyu Zheng & Kazuko Yamasaki & Joel N. Tenenbaum & H. Eugene Stanley, 2012. "Carbon-dioxide emissions trading and hierarchical structure in worldwide finance and commodities markets," Papers 1205.1861, arXiv.org, revised Aug 2013.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Cao, Guangxi & Zhang, Qi & Li, Qingchen, 2017. "Causal relationship between the global foreign exchange market based on complex networks and entropy theory," Chaos, Solitons & Fractals, Elsevier, vol. 99(C), pages 36-44.
    2. Gautier Marti & Frank Nielsen & Miko{l}aj Bi'nkowski & Philippe Donnat, 2017. "A review of two decades of correlations, hierarchies, networks and clustering in financial markets," Papers 1703.00485, arXiv.org, revised Nov 2020.
    3. Li, Jianxuan & Shi, Yingying & Cao, Guangxi, 2018. "Topology structure based on detrended cross-correlation coefficient of exchange rate network of the belt and road countries," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 509(C), pages 1140-1151.
    4. Coletti, Paolo, 2016. "Comparing minimum spanning trees of the Italian stock market using returns and volumes," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 463(C), pages 246-261.
    5. Wang, Ze & Gao, Xiangyun & Tang, Renwu & Liu, Xueyong & Sun, Qingru & Chen, Zhihua, 2019. "Identifying influential nodes based on fluctuation conduction network model," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 514(C), pages 355-369.
    6. Zeitsch, Peter J. & Davis, Tom P., 2021. "The price determinants of contingent convertible bonds," Finance Research Letters, Elsevier, vol. 43(C).
    7. Papana, Angeliki & Kyrtsou, Catherine & Kugiumtzis, Dimitris & Diks, Cees, 2017. "Financial networks based on Granger causality: A case study," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 482(C), pages 65-73.
    8. Xin Yang & Shan Chen & Hong Liu & Xiaoguang Yang & Chuangxia Huang, 2023. "Jump volatility spillover network based measurement of systemic importance of Chinese financial institutions," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 28(2), pages 1201-1213, April.
    9. Deviren, Seyma Akkaya & Deviren, Bayram, 2016. "The relationship between carbon dioxide emission and economic growth: Hierarchical structure methods," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 451(C), pages 429-439.
    10. Tao Zhou & Rui Ding & Yiming Du & Yilin Zhang & Shihui Cheng & Ting Zhang, 2022. "Study on the Coupling Coordination and Spatial Correlation Effect of Green Finance and High-Quality Economic Development—Evidence from China," Sustainability, MDPI, vol. 14(6), pages 1-22, March.
    11. Fatin Nur Amirah Mahamood & Hafizah Bahaludin & Mimi Hafizah Abdullah, 2019. "A Network Analysis of Shariah-Compliant Stocks across Global Financial Crisis: A Case of Malaysia," Modern Applied Science, Canadian Center of Science and Education, vol. 13(7), pages 1-80, July.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Gautier Marti & Frank Nielsen & Miko{l}aj Bi'nkowski & Philippe Donnat, 2017. "A review of two decades of correlations, hierarchies, networks and clustering in financial markets," Papers 1703.00485, arXiv.org, revised Nov 2020.
    2. Kazemilari, Mansooreh & Mardani, Abbas & Streimikiene, Dalia & Zavadskas, Edmundas Kazimieras, 2017. "An overview of renewable energy companies in stock exchange: Evidence from minimal spanning tree approach," Renewable Energy, Elsevier, vol. 102(PA), pages 107-117.
    3. Deviren, Seyma Akkaya & Deviren, Bayram, 2016. "The relationship between carbon dioxide emission and economic growth: Hierarchical structure methods," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 451(C), pages 429-439.
    4. Kazemilari, Mansooreh & Djauhari, Maman Abdurachman, 2015. "Correlation network analysis for multi-dimensional data in stocks market," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 429(C), pages 62-75.
    5. Leonidas Sandoval Junior & Italo De Paula Franca, 2011. "Correlation of financial markets in times of crisis," Papers 1102.1339, arXiv.org, revised Mar 2011.
    6. Sandoval, Leonidas & Franca, Italo De Paula, 2012. "Correlation of financial markets in times of crisis," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 391(1), pages 187-208.
    7. Djauhari, Maman Abdurachman & Gan, Siew Lee, 2013. "Minimal spanning tree problem in stock networks analysis: An efficient algorithm," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 392(9), pages 2226-2234.
    8. Lee, Junghoon & Youn, Janghyuk & Chang, Woojin, 2012. "Intraday volatility and network topological properties in the Korean stock market," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 391(4), pages 1354-1360.
    9. 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.
    10. Leonidas Sandoval Junior, 2011. "A Map of the Brazilian Stock Market," Papers 1107.4146, arXiv.org, revised Mar 2013.
    11. Marcin Wk{a}torek & Stanis{l}aw Dro.zd.z & Jaros{l}aw Kwapie'n & Ludovico Minati & Pawe{l} O'swik{e}cimka & Marek Stanuszek, 2020. "Multiscale characteristics of the emerging global cryptocurrency market," Papers 2010.15403, arXiv.org, revised Mar 2021.
    12. Cheong, Siew Ann & Fornia, Robert Paulo & Lee, Gladys Hui Ting & Kok, Jun Liang & Yim, Woei Shyr & Xu, Danny Yuan & Zhang, Yiting, 2011. "The Japanese economy in crises: A time series segmentation study," Economics Discussion Papers 2011-24, Kiel Institute for the World Economy (IfW Kiel).
    13. Sandoval, Leonidas, 2012. "Pruning a minimum spanning tree," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 391(8), pages 2678-2711.
    14. Kim, Kyungwon & Jung, Sean S., 2014. "Empirical analysis of structural change in Credit Default Swap volatility," Chaos, Solitons & Fractals, Elsevier, vol. 60(C), pages 56-67.
    15. Kantar, Ersin & Keskin, Mustafa, 2013. "The relationships between electricity consumption and GDP in Asian countries, using hierarchical structure methods," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 392(22), pages 5678-5684.
    16. Zhang, Yiting & Lee, Gladys Hui Ting & Wong, Jian Cheng & Kok, Jun Liang & Prusty, Manamohan & Cheong, Siew Ann, 2011. "Will the US economy recover in 2010? A minimal spanning tree study," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 390(11), pages 2020-2050.
    17. Radhakrishnan, Srinivasan & Duvvuru, Arjun & Sultornsanee, Sivarit & Kamarthi, Sagar, 2016. "Phase synchronization based minimum spanning trees for analysis of financial time series with nonlinear correlations," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 444(C), pages 259-270.
    18. Buscema, Massimo & Sacco, Pier Luigi, 2016. "MST Fitness Index and implicit data narratives: A comparative test on alternative unsupervised algorithms," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 461(C), pages 726-746.
    19. Kalyagin, V.A. & Koldanov, A.P. & Koldanov, P.A. & Pardalos, P.M. & Zamaraev, V.A., 2014. "Measures of uncertainty in market network analysis," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 413(C), pages 59-70.
    20. A. Q. Barbi & G. A. Prataviera, 2017. "Nonlinear dependencies on Brazilian equity network from mutual information minimum spanning trees," Papers 1711.06185, arXiv.org, revised May 2019.

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:phsmap:v:419:y:2015:i:c:p:108-114. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Liu (email available below). General contact details of provider: http://www.journals.elsevier.com/physica-a-statistical-mechpplications/ .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.