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Comparison of empirical and shrinkage correlation algorithm for clustering methods in the futures market

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  • Andrea Di Iura

    (Enel SpA)

Abstract

The correlation structure of the futures market obtained using daily data from 2009 to 2020 has been investigated to show how different sectors, such as energy or agriculture, produce a hierarchical clustering. The structure depends on the estimation of the correlation matrix; two techniques have been considered: the empirical and the shrinkage one. The networks obtained from those matrices differ from the presence of a hub, the UK Feed Wheat future, that drives the whole market if the shrinkage estimator for the correlation matrix is used. Additionally, an analysis of hierarchical structure changes in time adopting a measure of the similarity among clusters has been considered. It has been observed that the Ward criterion and the shrinkage estimation are the most robust to forecast the network structure.

Suggested Citation

  • Andrea Di Iura, 2022. "Comparison of empirical and shrinkage correlation algorithm for clustering methods in the futures market," SN Business & Economics, Springer, vol. 2(8), pages 1-17, August.
    • Handle: RePEc:spr:snbeco:v:2:y:2022:i:8:d:10.1007_s43546-022-00265-8
    DOI: 10.1007/s43546-022-00265-8
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