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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

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.

Suggested Citation

  • Eom, Cheoljun & Kwon, Okyu & Jung, Woo-Sung & Kim, Seunghwan, 2010. "The effect of a market factor on information flow between stocks using the minimal spanning tree," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 389(8), pages 1643-1652.
    • Handle: RePEc:eee:phsmap:v:389:y:2010:i:8:p:1643-1652
    DOI: 10.1016/j.physa.2009.12.044
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    Cited by:

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    3. I. F. C. Fernandes & E. F. G. Goldbarg & S. M. D. M. Maia & M. C. Goldbarg, 2020. "Empirical study of exact algorithms for the multi-objective spanning tree," Computational Optimization and Applications, Springer, vol. 75(2), pages 561-605, March.
    4. Muzi Chen & Nan Li & Lifen Zheng & Difang Huang & Boyao Wu, 2024. "Dynamic Correlation of Market Connectivity, Risk Spillover and Abnormal Volatility in Stock Price," Papers 2403.19363, arXiv.org.
    5. Gautier Marti & Frank Nielsen & Miko{l}aj Bi'nkowski & Philippe Donnat, 2017. "A review of two decades of correlations, hierarchies, networks and clustering in financial markets," Papers 1703.00485, arXiv.org, revised Nov 2020.
    6. Chen, Muzi & Li, Nan & Zheng, Lifen & Huang, Difang & Wu, Boyao, 2022. "Dynamic correlation of market connectivity, risk spillover and abnormal volatility in stock price," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 587(C).
    7. Lu, Jingen & Chen, Xiaohong & Liu, Xiaoxing, 2018. "Stock market information flow: Explanations from market status and information-related behavior," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 512(C), pages 837-848.
    8. Shamshuritawati Sharif & Maman Djauhari, 2012. "A Proposed Centrality Measure: The Case of Stocks Traded at Bursa Malaysia," Modern Applied Science, Canadian Center of Science and Education, vol. 6(10), pages 1-62, October.
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