Understanding Changes in the Topology and Geometry of Financial Market Correlations during a Market Crash

Laplacian Spectra of Persistent Structures in Taiwan, Singapore, and US Stock Markets

An important challenge in the study of complex systems is to identify appropriate effective variables at different times. In this paper, we explain why structures that are persistent with respect to changes in length and time scales are proper effective variables, and illustrate how persistent structures can be identified from the spectra and Fiedler vector of the graph Laplacian at different stages of the topological data analysis (TDA) filtration process for twelve toy models. We then investigated four market crashes, three of which were related to the COVID-19 pandemic. In all four crashes, a persistent gap opens up in the Laplacian spectra when we go from a normal phase to a crash phase. In the crash phase, the persistent structure associated with the gap remains distinguishable up to a characteristic length scale ϵ* where the first non-zero Laplacian eigenvalue changes most rapidly. Before ϵ*, the distribution of components in the Fiedler vector is predominantly bi-modal, and this distribution becomes uni-modal after ϵ*. Our findings hint at the possibility of understanding market crashs in terms of both continuous and discontinuous changes. Beyond the graph Laplacian, we can also employ Hodge Laplacians of higher order for future research.

TREPH: A Plug-In Topological Layer for Graph Neural Networks

Topological Data Analysis (TDA) is an approach to analyzing the shape of data using techniques from algebraic topology. The staple of TDA is Persistent Homology (PH). Recent years have seen a trend of combining PH and Graph Neural Networks (GNNs) in an end-to-end manner to capture topological features from graph data. Though effective, these methods are limited by the shortcomings of PH: incomplete topological information and irregular output format. Extended Persistent Homology (EPH), as a variant of PH, addresses these problems elegantly. In this paper, we propose a plug-in topological layer for GNNs, termed Topological Representation with Extended Persistent Homology (TREPH). Taking advantage of the uniformity of EPH, a novel aggregation mechanism is designed to collate topological features of different dimensions to the local positions determining their living processes. The proposed layer is provably differentiable and more expressive than PH-based representations, which in turn is strictly stronger than message-passing GNNs in expressive power. Experiments on real-world graph classification tasks demonstrate the competitiveness of TREPH compared with the state-of-the-art approaches.

Detection of Mutual Exciting Structure in Stock Price Trend Dynamics

We investigated a comprehensive analysis of the mutual exciting mechanism for the dynamic of stock price trends. A multi-dimensional Hawkes-model-based approach was proposed to capture the mutual exciting activities, which take the form of point processes induced by dual moving average crossovers. We first performed statistical measurements for the crossover event sequence, introducing the distribution of the inter-event times of dual moving average crossovers and the correlations of local variation (LV), which is often used in spike train analysis. It was demonstrated that the crossover dynamics in most stock sectors are generally more regular than a standard Poisson process, and the correlation between variations is ubiquitous. In this sense, the proposed model allowed us to identify some asymmetric cross-excitations, and a mutually exciting structure of stock sectors could be characterized by mutual excitation correlations obtained from the kernel matrix of our model. Using simulations, we were able to substantiate that a burst of the dual moving average crossovers in one sector increases the intensity of burst both in the same sector (self-excitation) as well as in other sectors (cross-excitation), generating episodes of highly clustered burst across the market. Furthermore, based on our finding, an algorithmic pair trading strategy was developed and backtesting results on real market data showed that the mutual excitation mechanism might be profitable for stock trading.