Reframing the S\&P500 Network of Stocks along the \nth{21} Century
Since the beginning of the new millennium, stock markets went through every state from long-time troughs, trade suspensions to all-time highs. The literature on asset pricing hence assumes random processes to be underlying the movement of stock returns. Observed procyclicality and time-varying correlation of stock returns tried to give the apparently random behavior some sort of structure. However, common misperceptions about the co-movement of asset prices in the years preceding the \emph{Great Recession}, is said to have even fueled the crisis' economic impact. Here we show how a varying macroeconomic environment influences stocks' clustering into communities. From a sample of 296 stocks of the S\&P 500 index, the periods 2000 to 2007 and 2007 through 2009 are used to develop networks of stocks. The Minimal Spanning Tree analysis of those time-varying networks of stocks demonstrates that the crisis drove the market from a star-like random network in the pre-crisis period, to a highly clustered community structure during the \emph{Great Recession}. A comparison with the \textit{General Industry Classification Standard} conveys the impression that the crisis, besides its devestating macroeconomic effect, helped to restore the stock market's ceased order of the pre-crisis era.
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Tanya Araújo (add twitter)
Maximilian Göbel (add twitter)
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