A cluster analysis of stock market data using hierarchical SOMs

Abstract

The analysis of stock markets has become relevant mainly because of its financial implications. In this paper, we propose a novel methodology for performing a structured cluster analysis of stock market data. Our proposed method uses a tree-based neural network called the TTOSOM. The TTOSOM performs self-organization to construct tree-based clusters of vector data in the multi-dimensional space. The resultant tree possesses interesting mathematical properties such as a succinct representation of the original data distribution, and a preservation of the underlying topology. In order to demonstrate the capabilities of our method, we analyze 206 assets of the Italian stock market. We were able to establish topological relationships between various companies traded on the Italian stock market and visually inspect the resultant taxonomy. The results that we obtained, briefly reported here (but more elaborately in [10]), were amazingly accurate and reflected the real-life relationships between the stocks.