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Dynamics of Cluster Structures in Stock Market Networks

Author

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  • Kocheturov, A.

    (Center for Applied Optimization, University of Florida, USA)

  • Batsyn, M.

    (NRU HSE, Nizhny Novgorod, Russia)

  • Pardalos, P.

    (NRU HSE, Nizhny Novgorod, Russia
    Center for Applied Optimization, University of Florida, USA)

Abstract

In recent 15 years network analysis has been actively applied for studying financial markets. In this paper we present a network-based analysis of stock markets of USA and Sweden. We extract and study special cluster structures of networks built from correlation matrices of stock returns for these stock markets. A cluster structure of a network is extracted by solving the p-median problem which chooses p central stocks (medians) and partitions all stocks into p clusters around these medians - centers. The objective function maximizes the sum of correlations between each stock and the median of its cluster. The obtained cluster structure is represented by an undirected disconnected weighted graph, which components are star-graphs with one central vertex (median) and several leaf vertices connected only with the median by weighted edges. Our main observation is that in non-crisis periods cluster structures of stock market networks change more chaotically, while during crises they demonstrate more stable behavior and smaller changes. Thus an increase in stability of the cluster structure for a stock market network obtained by means of the p-median problem solution can serve as an indicator of a coming crisis.

Suggested Citation

  • Kocheturov, A. & Batsyn, M. & Pardalos, P., 2015. "Dynamics of Cluster Structures in Stock Market Networks," Journal of the New Economic Association, New Economic Association, vol. 28(4), pages 12-30.
  • Handle: RePEc:nea:journl:y:2015:i:28:p:12-30
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    References listed on IDEAS

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    More about this item

    Keywords

    dynamics; cluster structure; stock markets; p-median problem; clustering; crisis; network analysis;

    JEL classification:

    • C65 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Miscellaneous Mathematical Tools
    • G17 - Financial Economics - - General Financial Markets - - - Financial Forecasting and Simulation

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