Complex Network Perspective of Stock Market
Chi K. Tse, Jing Liu and Francis Lau
Abstract:
Complex networks are constructed to study correlations between the closing prices for all US stocks that were traded from July 1, 2005 to August 30, 2007. 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 stock indices 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.
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
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