Dynamic asset trees and Black Monday

TL;DR

This paper analyzes how the structure of asset trees, built from stock correlations, changes dynamically during market crises like Black Monday, revealing topological shrinking and reconfiguration.

Contribution

It introduces a method to characterize the dynamics of asset trees using normalized length and mean occupation layer during market crises.

Findings

Tree length shrinks during Black Monday crisis

Significant topological reconfiguration occurs in the asset tree

Asset correlation structures become more compact during crises

Abstract

The minimum spanning tree, based on the concept of ultrametricity, is constructed from the correlation matrix of stock returns. The dynamics of this asset tree can be characterised by its normalised length and the mean occupation layer, as measured from an appropriately chosen centre called the `central node'. We show how the tree length shrinks during a stock market crisis, Black Monday in this case, and how a strong reconfiguration takes place, resulting in topological shrinking of the tree.