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Friendship of Stock Market Indices: A Cluster-Based Investigation of Stock Markets

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  • László Nagy

    (Department of Finance, Budapest University of Technology and Economics, Magyar tudosok krt. 2., 1117 Budapest, Hungary)

  • Mihály Ormos

    (Department of Economics, Janos Selye University, Hradná ul. 21., 94501 Komarno, Slovakia)

Abstract

This paper introduces a spectral clustering-based method to show that stock prices contain not only firm but also network-level information. We cluster different stock indices and reconstruct the equity index graph from historical daily closing prices. We show that tail events have a minor effect on the equity index structure. Moreover, covariance and Shannon entropy do not provide enough information about the network. However, Gaussian clusters can explain a substantial part of the total variance. In addition, cluster-wise regressions provide significant and stationer results.

Suggested Citation

  • László Nagy & Mihály Ormos, 2018. "Friendship of Stock Market Indices: A Cluster-Based Investigation of Stock Markets," JRFM, MDPI, vol. 11(4), pages 1-16, December.
    • Handle: RePEc:gam:jjrfmx:v:11:y:2018:i:4:p:88-:d:190227
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    References listed on IDEAS

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    Cited by:

    1. Rafael Esteves Mansano & Luiz Emilio Allem & Renata Raposo Del-Vecchio & Carlos Hoppen, 2022. "Balanced portfolio via signed graphs and spectral clustering in the Brazilian stock market," Quality & Quantity: International Journal of Methodology, Springer, vol. 56(4), pages 2325-2340, August.
    2. Arnab Bhattacharjee & Sudipto Roy, 2019. "Abnormal Returns or Mismeasured Risk? Network Effects and Risk Spillover in Stock Returns," JRFM, MDPI, vol. 12(2), pages 1-13, March.
    3. Dafne E. van Kuppevelt & Rena Bakhshi & Eelke M. Heemskerk & Frank W. Takes, 2022. "Community membership consistency applied to corporate board interlock networks," Journal of Computational Social Science, Springer, vol. 5(1), pages 841-860, May.
    4. Chang, Chiu-Lan & Fang, Ming, 2022. "The connectedness between natural resource commodities and stock market indices: Evidence from the Chinese economy," Resources Policy, Elsevier, vol. 78(C).

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