A New Method For Dynamic Stock Clustering Based On Spectral Analysis

Abstract

In this paper, we propose a new method to classify the stock cluster based on the motions of stock returns. Specifically, there are three criteria: (1) The positive or negative signs of elements in the eigenvector of correlation matrix indicate the response direction of individual stocks. (2) The components are included based on the sequence of corresponding eigenvalue magnitudes from large to small. (3) All the elements in the cluster representing individual stocks should have same signs across the components included in the classification process. With the number of vectors included in the process increasing, a speed-up process for cluster number is identified. We interpret this phenomenon as a phase transition from a state dominated by meaningful information to one dominated by trivial information. And a critical point exists in this process. The sizes of clusters near this critical point can be regarded as a power law distribution. The critical exponent evolvement indicates structure of the market. The vector number at this point can be adopted to classify the stock clusters. We analyze the cross-correlation matrices of stock logarithm returns of both China and US stock market for the period from January 4, 2005 to December 31, 2010. The period includes the anomalies time of financial crisis. The number of clusters in financial and technology sectors is further examined to reveal the varying feather of traditional industries. Distinct patterns of industrial differentiation between China and US have been found according to our study.

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Acknowledgments

The work was partially supported by the major research projects of philosophy and social science of the Chinese Ministry of Education (No. 15JZD015), National Natural Science Foundation of China (No. 11271368), Project supported by the Major Program of Beijing Philosophy and Social Science Foundation of China (No. 15ZDA17), Project of Ministry of Education supported by the Specialized Research Fund for the Doctoral Program of Higher Education of China (Grant No. 20130004110007) , the Key Program of National Philosophy and Social Science Foundation Grant (No. 13AZD064), the Major Project of Humanities Social Science Foundation of Ministry of Education (No. 15JJD910001), the Fundamental Research Funds for the Central Universities, and the Research Funds of Renmin University of China (No. 15XNL008), the Project of Flying Apsaras Scholar of Lanzhou University of Finance & Economics, and the Project of Tianshan Mountain Scholar of Xinjiang University of Finance & Economics.

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Correspondence to Maozai Tian.

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Li, Z., Tian, M. A New Method For Dynamic Stock Clustering Based On Spectral Analysis. Comput Econ 50, 373–392 (2017). https://doi.org/10.1007/s10614-016-9589-9

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Keywords

  • Stock return
  • Cross-correlation
  • Stock cluster
  • Phase transition
  • Spectral Analysis