Equity Markets’ Clustering and the Global Financial Crisis

C.E. Leon Rincon, Geun-Young Kim, Constanza Martínez, Daeyup Lee

Research output: Working paperDiscussion paperOther research output

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Abstract

The effect of the Global Financial Crisis (GFC) has been substantial across markets and countries worldwide. We examine how the GFC has changed the way equity markets group together based on the similarity of stock indices’ daily returns. Our examination is based on agglomerative clustering methods, which yield a hierarchical structure that represents how stock markets relate to each other based on their cross-section similarity. Main results show that both hierarchical structures, before and after the GFC, are readily interpretable, and indicate that geographical factors dominate the hierarchy. The main features of equity markets’ hierarchical structure agree with most stylized facts reported in related literature. The most noticeable change after the GFC is a stronger geographical clustering. Some changes in the hierarchy that do not conform to geographical clustering are explained by well-known idiosyncratic features or shocks.
Original languageEnglish
Place of PublicationTilburg
PublisherCentER, Center for Economic Research
Number of pages37
Volume2016-016
Publication statusPublished - 20 Apr 2016

Publication series

NameCentER Discussion Paper
Volume2016-016

Fingerprint

Clustering
Equity markets
Global financial crisis
Hierarchical structure
Stylized facts
Stock market
Cross section
Factors
Stock index

Keywords

  • clustering
  • unsupervised learning
  • Stock market
  • connextedness

Cite this

Leon Rincon, C. E., Kim, G-Y., Martínez, C., & Lee, D. (2016). Equity Markets’ Clustering and the Global Financial Crisis. (CentER Discussion Paper; Vol. 2016-016). Tilburg: CentER, Center for Economic Research.
Leon Rincon, C.E. ; Kim, Geun-Young ; Martínez, Constanza ; Lee, Daeyup. / Equity Markets’ Clustering and the Global Financial Crisis. Tilburg : CentER, Center for Economic Research, 2016. (CentER Discussion Paper).
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Leon Rincon, CE, Kim, G-Y, Martínez, C & Lee, D 2016 'Equity Markets’ Clustering and the Global Financial Crisis' CentER Discussion Paper, vol. 2016-016, CentER, Center for Economic Research, Tilburg.

Equity Markets’ Clustering and the Global Financial Crisis. / Leon Rincon, C.E.; Kim, Geun-Young; Martínez, Constanza; Lee, Daeyup.

Tilburg : CentER, Center for Economic Research, 2016. (CentER Discussion Paper; Vol. 2016-016).

Research output: Working paperDiscussion paperOther research output

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T1 - Equity Markets’ Clustering and the Global Financial Crisis

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N2 - The effect of the Global Financial Crisis (GFC) has been substantial across markets and countries worldwide. We examine how the GFC has changed the way equity markets group together based on the similarity of stock indices’ daily returns. Our examination is based on agglomerative clustering methods, which yield a hierarchical structure that represents how stock markets relate to each other based on their cross-section similarity. Main results show that both hierarchical structures, before and after the GFC, are readily interpretable, and indicate that geographical factors dominate the hierarchy. The main features of equity markets’ hierarchical structure agree with most stylized facts reported in related literature. The most noticeable change after the GFC is a stronger geographical clustering. Some changes in the hierarchy that do not conform to geographical clustering are explained by well-known idiosyncratic features or shocks.

AB - The effect of the Global Financial Crisis (GFC) has been substantial across markets and countries worldwide. We examine how the GFC has changed the way equity markets group together based on the similarity of stock indices’ daily returns. Our examination is based on agglomerative clustering methods, which yield a hierarchical structure that represents how stock markets relate to each other based on their cross-section similarity. Main results show that both hierarchical structures, before and after the GFC, are readily interpretable, and indicate that geographical factors dominate the hierarchy. The main features of equity markets’ hierarchical structure agree with most stylized facts reported in related literature. The most noticeable change after the GFC is a stronger geographical clustering. Some changes in the hierarchy that do not conform to geographical clustering are explained by well-known idiosyncratic features or shocks.

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Leon Rincon CE, Kim G-Y, Martínez C, Lee D. Equity Markets’ Clustering and the Global Financial Crisis. Tilburg: CentER, Center for Economic Research. 2016 Apr 20. (CentER Discussion Paper).