The effect of a market factor on information flow between stocks using minimal spanning tree

TL;DR

This paper explores how market factors influence information flow among stocks and demonstrates that the minimal spanning tree method effectively captures these dynamics, especially during market crises.

Contribution

It introduces the use of the MST method to analyze stock information flow, highlighting the impact of market factors and time-varying properties during crises.

Findings

Market factors significantly influence stock information flow.

Information flow increases during market crises.

MST effectively reduces link complexity while capturing key information flow patterns.

Abstract

We empirically investigated the effects of market factors on the information flow created from N(N-1)/2 linkage relationships among stocks. We also examined the possibility of employing the minimal spanning tree (MST) method, which is capable of reducing the number of links to N-1. We determined that market factors carry important information value regarding information flow among stocks. Moreover, the information flow among stocks evidenced time-varying properties according to the changes in market status. In particular, we noted that the information flow increased dramatically during periods of market crises. Finally, we confirmed, via the MST method, that the information flow among stocks could be assessed effectively with the reduced linkage relationships among all links between stocks from the perspective of the overall market.