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

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 file minimal spanning tree (MST) method, which is capable of reducing file number of links to N - 1 We determined that market factors carry important information value regarding information flow among stocks. Moreover, the information now among stocks showed mile-varying properties according to Hie changes in market slams. 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 now among stocks could be assessed effectively with the reduced linkage relationships among all links among stocks from the perspective of the overall market (C) 2009 Elsevier B V All rights reserved.