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Relation between financial market structure and the real economy: comparison between clustering methods

Musmeci, Nicoló, Aste, Tomaso and Di Matteo, T. (2015) Relation between financial market structure and the real economy: comparison between clustering methods. PLOS ONE, 10 (4). ISSN 1932-6203

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Identification Number: 10.1371/journal.pone.0126998.s002

Abstract

We quantify the amount of information filtered by different hierarchical clustering methods on correlations between stock returns comparing the clustering structure with the underlying industrial activity classification. We apply, for the first time to financial data, a novel hierarchical clustering approach, the Directed Bubble Hierarchical Tree and we compare it with other methods including the Linkage and k-medoids. By taking the industrial sector classification of stocks as a benchmark partition, we evaluate how the different methods retrieve this classification. The results show that the Directed Bubble Hierarchical Tree can outperform other methods, being able to retrieve more information with fewer clusters. Moreover, we show that the economic information is hidden at different levels of the hierarchical structures depending on the clustering method. The dynamical analysis on a rolling window also reveals that the different methods show different degrees of sensitivity to events affecting financial markets, like crises. These results can be of interest for all the applications of clustering methods to portfolio optimization and risk hedging

Item Type: Article
Official URL: http://www.plosone.org/
Additional Information: © 2015 Musmeci et al.
Divisions: LSE
Subjects: H Social Sciences > HG Finance
Date Deposited: 20 Apr 2015 15:29
Last Modified: 28 Jul 2019 23:10
Projects: ESRC ES/K002309/1
Funders: COST Action TD1210
URI: http://eprints.lse.ac.uk/id/eprint/61644

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