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Elucidation of the Backbone Structure of Cross-Market Dependency Network of World Market Indices: A Global Threshold Filtering Approach

Publisher : Frontiers in Artificial Intelligence and Applications

Campus : Amritapuri

Department : Department of Management

Year : 2018

Abstract : The multi-tiered cross-market dependency structures among capital market worldwide have a highly complex architecture which makes international portfolio management a challenging exercise. The challenge in recent times has been magnified given that the strengths of linkage structures have increased over the past decades. Understanding the complex interdependencies in a temporal scale and identifying the backbone structure in this interdependent system will aid in unearthing the avenues from where diversification benefits may possibly arise. With this objective in mind, the current study attempts to mathematically formulate the cross-market connectivity into weighted network models and elucidate the backbone structures by deploying a global threshold filtering approach. The present work investigates the dependency structure based on weekly-data series belonging to forty-three global markets. The weighted networks depicting cross-market relationships are filtered and visually inspected to decipher the significant connectivity structures. The study identifies that average cross-market linkage strengths increased during market stress conditions. The study also identified a disjointed set of markets wherein one can direct the investments to cushion oneself from systemic risk impacts.

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