A Network Perspective of the Stock Market

Chi K. Tse, Jing Liu and Francis Lau

C.K. Tse, J. Liu and F.C.M. Lau, “A network perspective of stock markets,” Journal of Empirical Finance, vol. 17, no. 4, pp. 659-667, September 2010.


Complex networks are constructed to study correlations between the closing prices for all US stocks that were traded over two periods of time (from July 2005 to August 2007; and from June 2007 to May 2009). The nodes are the stocks, and the connections are determined by cross correlations of the variations of the stock prices, price returns and trading volumes within a chosen period of time. Specifically, a winner-take-all approach is used to determine if two nodes are connected by an edge. To the best of our knowledge, no previous work has attempted to construct a full network of US stock prices that gives full information about their interdependence. We report that all networks based on connecting stocks of highly correlated stock prices, price returns and trading volumes, display a scalefree degree distribution. The results from this work clearly suggest that the variation of stock prices are strongly influenced by a relatively small number of stocks. We propose a new approach for selecting stocks for inclusion in a stock index and compare it with existing indexes. From the composition of the highly connected stocks, it can be concluded that the market is heavily dominated by stocks in the financial sector. [Self-study link]


Partial view of the network of US stock prices, based on Set 1 data, i.e., from the period July 1, 2005, to August 30, 2007. Node labels are stock abbreviations, e.g., YHOO is Yahoo! Inc., ACLTF is ATCO Ltd CL II VTG C, AGIBY is Anglo Irish Bank Corporation PLC, etc.

Contact: Chi K. Tse, Department of Electronic and Information Engineering, Hong Kong Polytechnic University

See also: http://chaos.eie.polyu.edu.hk/Projects.html

Uploaded on July 20, 2008; revised July 7, 2010.