Correlation filtering in financial time series

Details Correlation filtering in financial time series Correlation filtering in financial time series

2005-08-17

arxiv.org/abs/physics/0508118v1

in {\it Noise and Fluctuations in Econophysics and Finance}, Edited by D. Abbott, J.-P. Bouchaud, X. Gabaix, J. L. McCauley, P

Physics

Physics and Society

10 pages 7 figures

Scientific paper

We apply a method to filter relevant information from the correlation coefficient matrix by extracting a network of relevant interactions. This method succeeds to generate networks with the same hierarchical structure of the Minimum Spanning Tree but containing a larger amount of links resulting in a richer network topology allowing loops and cliques. In Tumminello et al. \cite{TumminielloPNAS05}, we have shown that this method, applied to a financial portfolio of 100 stocks in the USA equity markets, is pretty efficient in filtering relevant information about the clustering of the system and its hierarchical structure both on the whole system and within each cluster. In particular, we have found that triangular loops and 4 element cliques have important and significant relations with the market structure and properties. Here we apply this filtering procedure to the analysis of correlation in two different kind of interest rate time series (16 Eurodollars and 34 US interest rates).

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