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Sectoral Analysis of the US Stock Market through Complex Networks

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  • Dariusz Siudak

Abstract

Purpose: This study was carried out to analyze the structure of the aggregated network at the level of economic sectors and to reveal the central/peripheral sectors. Design/Methodology/Approach: The study uses the method of complex networks, with the two-step procedure employed to construct the network of economic sectors. First, the MST approach is utilized based on the cross-correlation of 496 stock price returns of the S&P500 Index. Then, the network is aggregated at the level of economic sectors. In addition, to analyze the graph, the network theory, multi-dimensional scaling (MDS), and relative importance approaches are employed. Findings: The results indicate that the sectoral network has a core/periphery structure. Based on the centrality measures, the ranking of sectors is provided. Of the 11 sectors, 3 are classified as central nodes, 4 as peripheral nodes, and the remaining 4 are classified as intermediate. In addition, the network configuration analysis demonstrates that the graph consists of two parts with a star-like structure, connected through the industrials sector. Practical Implications: An analysis of the cross-correlation network of aggregated assets at the level of economic sectors can be applied to ascertain the direction of stock price movements in the stock market. The division of sectors in the network into central and peripheral nodes has important implications for the management of an optimal portfolio of stocks. Originality/value: This study contributes to complex network theory and portfolio strategy design. A unique procedure is proposed to construct the network of economic sectors using the MST-based approach. Detection of the stock market network structure is vital for investors and regulators alike.

Suggested Citation

  • Dariusz Siudak, 2021. "Sectoral Analysis of the US Stock Market through Complex Networks," European Research Studies Journal, European Research Studies Journal, vol. 0(3B), pages 951-966.
    • Handle: RePEc:ers:journl:v:xxiv:y:2021:i:3b:p:951-966
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    References listed on IDEAS

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    More about this item

    Keywords

    Stock market network; correlation-based network; economic sectors; minimum spanning tree; centrality measures.;
    All these keywords.

    JEL classification:

    • C69 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Other
    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • L14 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Transactional Relationships; Contracts and Reputation

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