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The effect of a market factor on information flow between stocks using the minimal spanning tree

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  • Eom, Cheoljun
  • Kwon, Okyu
  • Jung, Woo-Sung
  • Kim, Seunghwan
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    Abstract

    We empirically investigated the effects of market factors on the information flow created from N(N−1)/2 linkage relationships among stocks. We also examined the possibility of employing the minimal spanning tree (MST) method, which is capable of reducing the number of links to N−1. We determined that market factors carry important information value regarding information flow among stocks. Moreover, the information flow among stocks showed time-varying properties according to the changes in market status. In particular, we noted that the information flow increased dramatically during periods of market crises. Finally, we confirmed, via the MST method, that the information flow among stocks could be assessed effectively with the reduced linkage relationships among all links among stocks from the perspective of the overall market.

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    Bibliographic Info

    Article provided by Elsevier in its journal Physica A: Statistical Mechanics and its Applications.

    Volume (Year): 389 (2010)
    Issue (Month): 8 ()
    Pages: 1643-1652

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    Handle: RePEc:eee:phsmap:v:389:y:2010:i:8:p:1643-1652

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    Web page: http://www.journals.elsevier.com/physica-a-statistical-mechpplications/

    Related research

    Keywords: Econophysics; Minimal spanning tree; Information flow;

    References

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    1. Jarque, Carlos M. & Bera, Anil K., 1980. "Efficient tests for normality, homoscedasticity and serial independence of regression residuals," Economics Letters, Elsevier, vol. 6(3), pages 255-259.
    2. Eom, Cheoljun & Jung, Woo-Sung & Choi, Sunghoon & Oh, Gabjin & Kim, Seunghwan, 2008. "Effects of time dependency and efficiency on information flow in financial markets," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 387(21), pages 5219-5224.
    3. Pettengill, Glenn N. & Sundaram, Sridhar & Mathur, Ike, 1995. "The Conditional Relation between Beta and Returns," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 30(01), pages 101-116, March.
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    5. Cheoljun Eom & Gabjin Oh & Seunghwan Kim, 2006. "Topological Properties of the Minimal Spanning Tree in Korean and American Stock Markets," Papers physics/0612068, arXiv.org, revised Jan 2007.
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    12. Cheoljun Eom & Woo-Sung Jung & Sunghoon Choi & Gabjin Oh & Seunghwan Kim, 2008. "Effects of time dependency and efficiency on information flow in financial markets," Papers 0802.1500, arXiv.org.
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    Cited by:
    1. Tabak, Benjamin M. & Serra, Thiago R. & Cajueiro, Daniel O., 2010. "Topological properties of stock market networks: The case of Brazil," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 389(16), pages 3240-3249.

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