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The effect of a market factor on information flow between stocks using the minimal spanning tree |
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| Authors: | Cheoljun Eom Okyu Kwon Seunghwan Kim |
| Institution: | a Division of Business Administration, Pusan National University, Busan 609-735, Republic of Korea b Department of Finance, College of Business, University of Cincinnati, Cincinnati, OH 45221, USA c Northwestern Institute on Complex Systems, Northwestern University, Evanston, IL 60208, USA d Department of Physics and Basic Science Research Institute, Pohang University of Science and Technology, Pohang 790-784, Republic of Korea e Technology Innovation and Management Graduate Program, Pohang University of Science and Technology, Pohang 790-784, Republic of Korea f Asia Pacific Center for Theoretical Physics, Pohang 790-784, Republic of Korea |
| 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. |
| Keywords: | Econophysics Minimal spanning tree Information flow |
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