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Nonlinear Systems, Vol. 1 pp 317–338Cite as

Anticipating Abrupt Changes in Complex Networks: Significant Falls in the Price of a Stock Index

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Part of the book series: Understanding Complex Systems ((UCS))

Abstract

Early prediction of abrupt changes in complex systems is of great interest in preventing unwanted effects. This has recently led to the establishment of indicators whose evolution may be indicative of some of such changes. Here we present a criterion to predict the sharp fall in the prices of a stock market index. We have studied the moving networks constituted by the companies included in several indexes (IBEX35, CAC40, DAX30 and Euro Stoxx50), constructing the corresponding “Minimal Spanning Tree (MST)”. When the number of leading nodes in the network decreases in a substantial manner, the network has few leaders, and if those suffer any fall, the index might fall as well. By means of this hypothesis, we are looking for a rotation direction beforehand, a downward rotation. Using daily closing price series from 2007 to 2017 for these indexes, we can point out that when the number of leading nodes is small, and the average correlation of companies forming an index decreases, placing itself below 0.4–0.5, depending on the index, and this decrease is accompanied by a significant increase in the correlation deviation, the price tends to fall at around 70% of reliability.

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Acknowledgements

AC acknowledges Junta de Andalucía (Spain) by partially funding to his research group (FQM-122).

Author information

Authors and Affiliations

  1. Departamento de Física de la Materia Condensada, Universidad de Sevilla, Avda Reina Mercedes s/n, 41012, Sevilla, Spain

    Antonio Cordoba

  2. Instituto IBT, Parque Empresarial Nuevo Torneo, C/ Astronomía, 1, torre 2, planta 10, 41001, Sevilla, Spain

    Christian Castillejo & Ana M. Lara

  3. Departamento de Economía Financiera, Contabilidad y Dirección de Operaciones, Universidad de Huelva, Plaza de la Merced, 11, 21002, Huelva, Spain

    Juan J. García-Machado

Authors
  1. Antonio Cordoba
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  2. Christian Castillejo
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  3. Juan J. García-Machado
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  4. Ana M. Lara
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Corresponding author

Correspondence to Antonio Cordoba .

Editor information

Editors and Affiliations

  1. Departamento de Matemática Aplicada II, Universidad de Sevilla, Sevilla, Spain

    Victoriano Carmona

  2. Departamento de Física Aplicada I, Universidad de Sevilla, Sevilla, Spain

    Jesús Cuevas-Maraver

  3. Departamento de Matemática Aplicada II, Universidad de Sevilla, Sevilla, Spain

    Fernando Fernández-Sánchez

  4. Departamento de Matemática Aplicada II, Universidad de Sevilla, Sevilla, Spain

    Elisabeth García- Medina

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Cordoba, A., Castillejo, C., García-Machado, J.J., Lara, A.M. (2018). Anticipating Abrupt Changes in Complex Networks: Significant Falls in the Price of a Stock Index. In: Carmona, V., Cuevas-Maraver, J., Fernández-Sánchez, F., García- Medina, E. (eds) Nonlinear Systems, Vol. 1. Understanding Complex Systems. Springer, Cham. https://doi.org/10.1007/978-3-319-66766-9_11

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