Reconstructing an economic space from a market metric

Details Reconstructing an economic space from a market metric Reconstructing an economic space from a market metric

2002-11-06

arxiv.org/abs/cond-mat/0211108v1

Physica A 323 (2003) 635

Physics

Condensed Matter

Statistical Mechanics

20 pages Latex, 9 figures

Scientific paper

10.1016/S0378-4371(03)00014-1

Using a metric related to the returns correlation, a method is proposed to reconstruct an economic space from the market data. A reduced subspace, associated to the systematic structure of the market, is identified and its dimension related to the number of terms in factor models. Example were worked out involving sets of companies from the DJIA and S&P500 indexes. Having a metric defined in the space of companies, network topology coefficients may be used to extract further information from the data. A notion of "continuous clustering" is defined and empirically related to the occurrence of market shocks.

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