Loss of structural balance in stock markets

Abstract We use rank correlations as distance functions to establish the interconnectivity between stock returns, building weighted signed networks for the stocks of seven European countries, the US and Japan. We establish the theoretical relationship between the level of balance in a network and st...

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Autores principales:	Eva Ferreira, Susan Orbe, Jone Ascorbebeitia, Brais Álvarez Pereira, Ernesto Estrada
Formato:	article
Lenguaje:	EN
Publicado:	Nature Portfolio 2021
Materias:	Medicine R Science Q
Acceso en línea:	https://doaj.org/article/b71fef27284540719b761aee11e8bdb4
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spelling	oai:doaj.org-article:b71fef27284540719b761aee11e8bdb42021-12-02T17:30:41ZLoss of structural balance in stock markets10.1038/s41598-021-91266-42045-2322https://doaj.org/article/b71fef27284540719b761aee11e8bdb42021-06-01T00:00:00Zhttps://doi.org/10.1038/s41598-021-91266-4https://doaj.org/toc/2045-2322Abstract We use rank correlations as distance functions to establish the interconnectivity between stock returns, building weighted signed networks for the stocks of seven European countries, the US and Japan. We establish the theoretical relationship between the level of balance in a network and stock predictability, studying its evolution from 2005 to the third quarter of 2020. We find a clear balance–unbalance transition for six of the nine countries, following the August 2011 Black Monday in the US, when the Economic Policy Uncertainty index for this country reached its highest monthly level before the COVID-19 crisis. This sudden loss of balance is mainly caused by a reorganization of the market networks triggered by a group of low capitalization stocks belonging to the non-financial sector. After the transition, the stocks of companies in these groups become all negatively correlated between them and with most of the rest of the stocks in the market. The implied change in the network topology is directly related to a decrease in stock predictability, a finding with novel important implications for asset allocation and portfolio hedging strategies.Eva FerreiraSusan OrbeJone AscorbebeitiaBrais Álvarez PereiraErnesto EstradaNature PortfolioarticleMedicineRScienceQENScientific Reports, Vol 11, Iss 1, Pp 1-10 (2021)
institution	DOAJ
collection	DOAJ
language	EN
topic	Medicine R Science Q
spellingShingle	Medicine R Science Q Eva Ferreira Susan Orbe Jone Ascorbebeitia Brais Álvarez Pereira Ernesto Estrada Loss of structural balance in stock markets
description	Abstract We use rank correlations as distance functions to establish the interconnectivity between stock returns, building weighted signed networks for the stocks of seven European countries, the US and Japan. We establish the theoretical relationship between the level of balance in a network and stock predictability, studying its evolution from 2005 to the third quarter of 2020. We find a clear balance–unbalance transition for six of the nine countries, following the August 2011 Black Monday in the US, when the Economic Policy Uncertainty index for this country reached its highest monthly level before the COVID-19 crisis. This sudden loss of balance is mainly caused by a reorganization of the market networks triggered by a group of low capitalization stocks belonging to the non-financial sector. After the transition, the stocks of companies in these groups become all negatively correlated between them and with most of the rest of the stocks in the market. The implied change in the network topology is directly related to a decrease in stock predictability, a finding with novel important implications for asset allocation and portfolio hedging strategies.
format	article
author	Eva Ferreira Susan Orbe Jone Ascorbebeitia Brais Álvarez Pereira Ernesto Estrada
author_facet	Eva Ferreira Susan Orbe Jone Ascorbebeitia Brais Álvarez Pereira Ernesto Estrada
author_sort	Eva Ferreira
title	Loss of structural balance in stock markets
title_short	Loss of structural balance in stock markets
title_full	Loss of structural balance in stock markets
title_fullStr	Loss of structural balance in stock markets
title_full_unstemmed	Loss of structural balance in stock markets
title_sort	loss of structural balance in stock markets
publisher	Nature Portfolio
publishDate	2021
url	https://doaj.org/article/b71fef27284540719b761aee11e8bdb4
work_keys_str_mv	AT evaferreira lossofstructuralbalanceinstockmarkets AT susanorbe lossofstructuralbalanceinstockmarkets AT joneascorbebeitia lossofstructuralbalanceinstockmarkets AT braisalvarezpereira lossofstructuralbalanceinstockmarkets AT ernestoestrada lossofstructuralbalanceinstockmarkets
_version_	1718380749665599488

Loss of structural balance in stock markets

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