Sector identification in a set of stock return time series traded at the London Stock Exchange

Research paper by C. Coronnello, M. Tumminello, F. Lillo, S. Miccichè, R. N. Mantegna

Indexed on: 04 Aug '05Published on: 04 Aug '05Published in: Physics - Disordered Systems and Neural Networks


We compare some methods recently used in the literature to detect the existence of a certain degree of common behavior of stock returns belonging to the same economic sector. Specifically, we discuss methods based on random matrix theory and hierarchical clustering techniques. We apply these methods to a portfolio of stocks traded at the London Stock Exchange. The investigated time series are recorded both at a daily time horizon and at a 5-minute time horizon. The correlation coefficient matrix is very different at different time horizons confirming that more structured correlation coefficient matrices are observed for long time horizons. All the considered methods are able to detect economic information and the presence of clusters characterized by the economic sector of stocks. However different methods present a different degree of sensitivity with respect to different sectors. Our comparative analysis suggests that the application of just a single method could not be able to extract all the economic information present in the correlation coefficient matrix of a stock portfolio.