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Pruning a minimum spanning tree

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  • Sandoval, Leonidas
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    Abstract

    This work employs various techniques in order to filter random noise from the information provided by minimum spanning trees obtained from the correlation matrices of international stock market indices prior to and during times of crisis. The first technique establishes a threshold above which connections are considered affected by noise, based on the study of random networks with the same probability density distribution of the original data. The second technique is to judge the strength of a connection by its survival rate, which is the amount of time a connection between two stock market indices endures. The idea is that true connections will survive for longer periods of time, and that random connections will not. That information is then combined with the information obtained from the first technique in order to create a smaller network, in which most of the connections are either strong or enduring in time.

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    Bibliographic Info

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

    Volume (Year): 391 (2012)
    Issue (Month): 8 ()
    Pages: 2678-2711

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    Handle: RePEc:eee:phsmap:v:391:y:2012:i:8:p:2678-2711

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

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    Keywords: Financial markets; Minimum spanning tree; Pruning; Random matrix theory;

    References

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    Cited by:
    1. Sandoval, Leonidas, 2014. "To lag or not to lag? How to compare indices of stock markets that operate on different times," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 403(C), pages 227-243.

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