Structural Change and Dynamics of Pakistan Stock Market during Crisis: A Complex Network Perspective

Abstract

We studied the cross-correlations in the daily closing prices of 181 stocks listed on the Pakistan stock exchange (PSX) covering a time period of 2007–2017 to compute the threshold networks and minimum spanning trees. In addition to the full sample analysis, our study uses three subsamples to examine the structural change and topological evolution before, during, and after the global financial crisis of 2008. We also apply Shannon entropy on the overall sample to measure the volatility of individual stocks. Our results find substantial clustering and a crisis-like less stable overall market structure, given the external and internal events of terrorism, political, financial, and economic crisis for Pakistan. The subsample results further reveal hierarchal scale-free structures and a reconfigured metastable market structure during a postcrisis period. In addition, time varying topological measures confirm the evidence of the presence of several star-like structures, the shrinkage of tree length due to crisis-related shocks, and an expansion in the recovery phase. Finally, changes of the central node of minimum spanning trees (MSTs), the volatile stock recognition using Shannon entropy, and the topology of threshold networks will help local and international investors of Pakistan Stock Exchange limited (PSX) to manage their portfolios or regulators to monitor the important nodes to achieve stability and to predict an upcoming crisis.

General election effect on the network topology of Pakistan’s stock market: network-based study of a political event

“…Network-based methods are widely applied by researchers to study interdependency and the evolution of stock markets, such as minimum spanning tree (MST) (Mantegna 1999;Onnela et al 2003b;Zhao et al 2018;Yao and Memon 2019), threshold networks (CT) (Boginski et al 2005;Lee and Nobi 2018), planar maximally filtered graphs (PMFG) (Tumminello et al 2005;Yan et al 2015;Musmeci et al 2016), wavelet (Wang et al 2017), and multiple criteria decision making (MCDM) (Kou et al 2014). We have chosen MST, a main network mapping methodology extensively used to analyze various financial crisis (Wiliński et al 2013;Majapa and Gossel 2016;Coletti and Murgia 2016;Xia et al 2018;Memon and Yao 2019;Kou et al 2019), currency crisis (Jang et al 2011;Sultornsanee et al 2013), sovereign debt crisis events (Dias 2012), as well as macroeconomic phases (Zhang et al 2011). Therefore, this paper examines the interdependency and evolution of Pakistan's stock market by using MST before and after the general elections of 2018, 2013, and 2008. In the summary, our study has made two contributions.…”

Research on Invulnerability Technology of Node Attack in Space-Based Information Network Based on Complex Network

“…As a significant research method on complex giant systems, the complex network theory highlights the topological characteristics of the system structure, which is an important basis to describe the whole network node abstraction and connection relation. Nowadays, the complex network theory has been widely used in the network characteristic analysis, structure optimization, vulnerability and invulnerability analysis of the Internet, traffic network, power network, communication network and optional network, which results in a series of achievements [9][10][11][12][13][14][15][16].…”

Market of Stocks during Crisis Looks Like a Flock of Birds

“…Despite growing stronger being in a group for each member, it would itself be a major factor to spread a problem of each member within the whole group. One of the most important issues in businesses is the prediction of this significant shift during a financial crisis [ 4 , 5 , 6 , 7 , 8 ]. This has been considered in previous studies with a variety of approaches [ 9 , 10 ].…”