title: Relation between financial market structure and the real economy: comparison between clustering methods.
abstract: We quantify the amount of information filtered by different hierarchical clustering methods on correlations between stock returns comparing the clustering structure with the underlying industrial activity classification. We apply, for the first time to financial data, a novel hierarchical clustering approach, the Directed Bubble Hierarchical Tree and we compare it with other methods including the Linkage and k-medoids. By taking the industrial sector classification of stocks as a benchmark partition, we evaluate how the different methods retrieve this classification. The results show that the Directed Bubble Hierarchical Tree can outperform other methods, being able to retrieve more information with fewer clusters. Moreover,we show that the economic information is hidden at different levels of the hierarchical structures depending on the clustering method. The dynamical analysis on a rolling window also reveals that the different methods show different degrees of sensitivity to events affecting financial markets, like crises. These results can be of interest for all the applications of clustering methods to portfolio optimization and risk hedging [corrected].
authors: Department of Mathematics, King's College London, The Strand, London, WC2R 2LS, UK.
authors: Nicoló
authors: N
authors: Musmeci
authors: Department of Computer Science, UCL, Gower Street, London, WC1E 6BT, UK; Systemic Risk Centre, London School of Economics and Political Sciences, London, WC2A2AE, UK.
authors: Tomaso
authors: T
authors: Aste
authors: Department of Mathematics, King's College London, The Strand, London, WC2R 2LS, UK.
authors: T
authors: T
authors: Di Matteo
mesh_terms: D005376:Financial Management; D006801:Humans; D040541:Marketing; D018803:Models, Economic