Dynamics of market correlations: Taxonomy and portfolio analysis

J. P. Onnela*, A. Chakraborti, K. Kaski, J. Kertész, A. Kanto

*Corresponding author for this work

Research output: Contribution to journalArticlepeer-review

Abstract (may include machine translation)

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.

Original languageEnglish
Article number056110
Pages (from-to)561101-5611012
JournalPhysical Review E - Statistical Physics, Plasmas, Fluids, and Related Interdisciplinary Topics
Volume68
Issue number5
DOIs
StatePublished - Nov 2003
Externally publishedYes

Fingerprint

Dive into the research topics of 'Dynamics of market correlations: Taxonomy and portfolio analysis'. Together they form a unique fingerprint.

Cite this