Pruning a Minimum Spanning Tree

Details Pruning a Minimum Spanning Tree Pruning a Minimum Spanning Tree

2011-09-03

arxiv.org/abs/1109.0642v1

Economy

Quantitative Finance

Statistical Finance

Scientific paper

This work employs some techniques in order to filter random noise from the information provided by minimum spanning trees obtained from the correlation matrices of international stock market indices prior to and during times of crisis. The first technique establishes a threshold above which connections are considered affected by noise, based on the study of random networks with the same probability density distribution of the original data. The second technique is to judge the strengh of a connection by its survival rate, which is the amount of time a connection between two stock market indices endure. The idea is that true connections will survive for longer periods of time, and that random connections will not. That information is then combined with the information obtained from the first technique in order to create a smaller network, where most of the connections are either strong or enduring in time.

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