Analysis of stock market indices with multidimensional scaling and wavelets

Abstract

Stock market indices (SMIs) are important measures of financial and economical performance. Considerable research efforts during the last years demonstrated that these signals have a chaotic nature and require sophisticated mathematical tools for analyzing their characteristics. Classical methods, such as the Fourier transform, reveal considerable limitations in discriminating different periods of time. This paper studies the dynamics of SMI by combining the wavelet transform and the multidimensional scaling (MDS). Six continuous wavelets are tested for analyzing the information content of the stock signals. In a first phase, the real Shannon wavelet is adopted for performing the evaluation of the SMI dynamics, while their comparison is visualized by means of the MDS. In a second phase, the other wavelets are also tested, and the corresponding MDS plots are analyzed. Copyright © 2012 J. Tenreiro Machado et al.