Abstract
Market graph is built on the basis of some similarity measure for financial asset returns. The chapter considers two similarity measures: classic Pearson correlation and sign correlation. We study the associated market graphs and compare the conditional risk of the market graph construction for these two measures of similarity. Our main finding is that the conditional risk for the sign correlation is much better than for the Pearson correlation for larger values of threshold for several probabilistic models. In addition, we show that for some model the conditional risk for sign correlation dominates over the conditional risk for Pearson correlation for all values of threshold. These properties make sign correlation a more appropriate measure for the maximum clique analysis.
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Acknowledgements
The authors are partially supported by LATNA Laboratory, NRU HSE, RF government grant, ag. 11.G34.31.0057.
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Bautin, G.A., Kalyagin, V.A., Koldanov, A.P. (2013). Comparative Analysis of Two Similarity Measures for the Market Graph Construction. In: Goldengorin, B., Kalyagin, V., Pardalos, P. (eds) Models, Algorithms, and Technologies for Network Analysis. Springer Proceedings in Mathematics & Statistics, vol 59. Springer, New York, NY. https://doi.org/10.1007/978-1-4614-8588-9_3
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DOI: https://doi.org/10.1007/978-1-4614-8588-9_3
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