Structure of local interactions in complex financial dynamics

TL;DR

This paper uses network methods and random matrix theory to analyze the interaction structure of financial market communities, revealing sector-based local interactions and their evolution during crises.

Contribution

It clarifies that local interactions are mainly in the sector mode and studies their dynamic changes during financial bubbles and crises.

Findings

Local interactions are mainly contained in the sector mode.

Average correlation inside sectors is positive, between sectors is negative.

Interaction structures change dramatically during financial crises.

Abstract

With the network methods and random matrix theory, we investigate the interaction structure of communities in financial markets. In particular, based on the random matrix decomposition, we clarify that the local interactions between the business sectors (subsectors) are mainly contained in the sector mode. In the sector mode, the average correlation inside the sectors is positive, while that between the sectors is negative. Further, we explore the time evolution of the interaction structure of the business sectors, and observe that the local interaction structure changes dramatically during a financial bubble or crisis.