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Relation between Financial Market Structure and the Real Economy: Comparison between Clustering Methods.

Musmeci, N; Aste, T; Di Matteo, T; (2015) Relation between Financial Market Structure and the Real Economy: Comparison between Clustering Methods. PLoS One , 10 (3) , Article e0116201. 10.1371/journal.pone.0116201. Green open access

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Abstract

We quantify the amount of information ltered by dierent hierarchical clustering methods on correlations between stock returns comparing the clustering structure with the underlying industrial activity classication. We apply, for the rst time to nancial 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 classication of stocks as a benchmark partition, we evaluate how the dierent methods retrieve this classication. 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 dierent levels of the hierarchical structures depending on the clustering method. The dynamical analysis on a rolling window also reveals that the dierent methods show dierent degrees of sensitivity to events aecting nancial markets, like crises. These results can be of interest for all the applications of clustering methods to portfolio optimization and risk hedging.

Type: Article
Title: Relation between Financial Market Structure and the Real Economy: Comparison between Clustering Methods.
Location: United States
Open access status: An open access version is available from UCL Discovery
DOI: 10.1371/journal.pone.0116201
Publisher version: http://dx.doi.org/10.1371/journal.pone.0116201
Language: English
Additional information: © 2015 Musmeci et al. This is an open access article distributed under the terms of the Creative Commons Attribution License, which permits unrestricted use, distribution, and reproduction in any medium, provided the original author and source are credited
UCL classification: UCL
UCL > Provost and Vice Provost Offices > UCL BEAMS
UCL > Provost and Vice Provost Offices > UCL BEAMS > Faculty of Engineering Science
UCL > Provost and Vice Provost Offices > UCL BEAMS > Faculty of Engineering Science > Dept of Computer Science
URI: https://discovery.ucl.ac.uk/id/eprint/1432114
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