The Application of Network Analysis in Financal Markets Using Correlation and Mutual Information

Abstract

THE AIMS OF THE PAPER

The aim of the study to demonstrate the application of the network analysis on the financial markets through a domestic example, and to present the usage of the mutual information.

METHODOLOGY

The study compares networks based on the correlation coefficient and the mutual information, using the log returns of stock prices of the Budapest Stock Exchange between January 2006 and June 2018.

MOST IMPORTANT RESULTS

Small-world and scale-free properties are more recognizable on networks based on the mutual information, which underpins the results of the previous studies. Another interesting issue is the strong correlation betwen small-world and scale-free properties.

RECOMMENDATIONS

It would be interesting to study the differences between the correlation coefficient and the mutual information, and examine other possibilities of applications of the mutual information.