Degree stability of a minimum spanning tree of price return and volatility

TL;DR

This study compares the temporal stability of minimum spanning trees derived from asset return and volatility time series, revealing that return-based trees are more stable over time with slow dynamics spanning several years.

Contribution

It introduces a comparative analysis of degree stability in minimum spanning trees based on return and volatility data, highlighting differences in their temporal dynamics.

Findings

Return-based MST degrees are more stable over time.

Both MST types exhibit slow dynamics with multi-year time scales.

Volatility-based MST degrees are less stable than return-based ones.

Abstract

We investigate the time series of the degree of minimum spanning trees obtained by using a correlation based clustering procedure which is starting from (i) asset return and (ii) volatility time series. The minimum spanning tree is obtained at different times by computing correlation among time series over a time window of fixed length $T$. We find that the minimum spanning tree of asset return is characterized by stock degree values, which are more stable in time than the ones obtained by analyzing a minimum spanning tree computed starting from volatility time series. Our analysis also shows that the degree of stocks has a very slow dynamics with a time-scale of several years in both cases.