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New Techniques  |  DEC 2000

Market Topology by Nicolas Vandewalle, Ph.D.

Market Topology by Nicolas Vandewalle, Ph.D. Stock W affects stock X, which in turn affects stock Y, which drives stock Z. How do you work out all the interconnectivity? By using a market tree. No single indicator seems to represent the global (or local) structure of the market. It is possible to group stocks by sectors and to assume that stocks in the same basket are highly correlated, but doing so leaves the structure within a sector and the relationships between sectors unspecified. Is an objective representation of the market’s structure possible? Could such a representation lead to a global view of the relationships between sectors or to a local view of the relationships between stocks? Knowing these relationships could provide trading advantages. Here’s an indicator that might be able to help you.

by Nicolas Vandewalle, Ph.D.

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