TY - JOUR

T1 - Dynamics of market correlations

T2 - Taxonomy and portfolio analysis

AU - Onnela, J. P.

AU - Chakraborti, A.

AU - Kaski, K.

AU - Kertész, J.

AU - Kanto, A.

PY - 2003/11

Y1 - 2003/11

N2 - The time dependence of the recently introduced minimum spanning tree description of correlations between stocks, called the “asset tree” has been studied in order to reflect the financial market taxonomy. The nodes of the tree are identified with stocks and the distance between them is a unique function of the corresponding element of the correlation matrix. By using the concept of a central vertex, chosen as the most strongly connected node of the tree, an important characteristic is defined by the mean occupation layer. During crashes, due to the strong global correlation in the market, the tree shrinks topologically, and this is shown by a low value of the mean occupation layer. The tree seems to have a scale-free structure where the scaling exponent of the degree distribution is different for “business as usual” and “crash” periods. The basic structure of the tree topology is very robust with respect to time. We also point out that the diversification aspect of portfolio optimization results in the fact that the assets of the classic Markowitz portfolio are always located on the outer leaves of the tree. Technical aspects such as the window size dependence of the investigated quantities are also discussed.

AB - The time dependence of the recently introduced minimum spanning tree description of correlations between stocks, called the “asset tree” has been studied in order to reflect the financial market taxonomy. The nodes of the tree are identified with stocks and the distance between them is a unique function of the corresponding element of the correlation matrix. By using the concept of a central vertex, chosen as the most strongly connected node of the tree, an important characteristic is defined by the mean occupation layer. During crashes, due to the strong global correlation in the market, the tree shrinks topologically, and this is shown by a low value of the mean occupation layer. The tree seems to have a scale-free structure where the scaling exponent of the degree distribution is different for “business as usual” and “crash” periods. The basic structure of the tree topology is very robust with respect to time. We also point out that the diversification aspect of portfolio optimization results in the fact that the assets of the classic Markowitz portfolio are always located on the outer leaves of the tree. Technical aspects such as the window size dependence of the investigated quantities are also discussed.

UR - http://www.scopus.com/inward/record.url?scp=0942278439&partnerID=8YFLogxK

U2 - 10.1103/PhysRevE.68.056110

DO - 10.1103/PhysRevE.68.056110

M3 - Article

AN - SCOPUS:0942278439

SN - 1063-651X

VL - 68

SP - 561101

EP - 5611012

JO - Physical Review E - Statistical Physics, Plasmas, Fluids, and Related Interdisciplinary Topics

JF - Physical Review E - Statistical Physics, Plasmas, Fluids, and Related Interdisciplinary Topics

IS - 5

M1 - 056110

ER -