title: Dominating clasp of the financial sector revealed by partial correlation analysis of the stock market.
abstract: What are the dominant stocks which drive the correlations present among stocks traded in a stock market? Can a correlation analysis provide an answer to this question? In the past, correlation based networks have been proposed as a tool to uncover the underlying backbone of the market. Correlation based networks represent the stocks and their relationships, which are then investigated using different network theory methodologies. Here we introduce a new concept to tackle the above question--the partial correlation network. Partial correlation is a measure of how the correlation between two variables, e.g., stock returns, is affected by a third variable. By using it we define a proxy of stock influence, which is then used to construct partial correlation networks. The empirical part of this study is performed on a specific financial system, namely the set of 300 highly capitalized stocks traded at the New York Stock Exchange, in the time period 2001-2003. By constructing the partial correlation network, unlike the case of standard correlation based networks, we find that stocks belonging to the financial sector and, in particular, to the investment services sub-sector, are the most influential stocks affecting the correlation profile of the system. Using a moving window analysis, we find that the strong influence of the financial stocks is conserved across time for the investigated trading period. Our findings shed a new light on the underlying mechanisms and driving forces controlling the correlation profile observed in a financial market.
authors.affiliation: School of Physics and Astronomy, Tel-Aviv University, Tel-Aviv, Israel.
authors.forename: Dror Y
authors.initials: DY
authors.lastname: Kenett
authors.forename: Michele
authors.initials: M
authors.lastname: Tumminello
authors.forename: Asaf
authors.initials: A
authors.lastname: Madi
authors.forename: Gitit
authors.initials: G
authors.lastname: Gur-Gershgoren
authors.forename: Rosario N
authors.initials: RN
authors.lastname: Mantegna
authors.forename: Eshel
authors.initials: E
authors.lastname: Ben-Jacob
mesh_terms: D000465:Algorithms; D005544:Forecasting; D006801:Humans; D007449:Investments / Q000191:economics*; D040541:Marketing / Q000191:economics; D018803:Models, Economic; D015233:Models, Statistical; D008962:Models, Theoretical; D009518:New York