The stability of financial market networks

¹ College of Business Administration, Hunan University - Changsha 410082, China
² Center of Finance and Investment Management, Hunan University - Changsha 410082, China

^(a) xiechi@hnu.edu.cn

Received: 21 April 2014
Accepted: 29 July 2014

Abstract

We investigate the stability of a financial market network by measuring its topological robustness, namely the ability of the network to resist structural or topological changes. The closing prices of 710 stocks in the Shanghai Stock Exchange (SSE) from 2005 to 2011 are chosen as the empirical data. We divide the period into three sub-periods: before, during, and after the US sub-prime crisis. By monitoring the size of the clusters which fall apart from the network after removing the nodes (i.e., the listed companies in the SSE), we find that: i) the SSE network is sensitive to the nodes' failure, which implies that the network is unstable. ii) the SSE network before the financial crisis has the strongest robustness against the intentional topological damage; iii) the hubs (i.e., highly connected nodes) connect with each other directly and play a vital important role in maintaining SSE network's stability.