Asset-asset interactions and clustering in financial markets

The collective phenomena of a liquid market is characterized in terms of a particle system scenario. This physical analogy enables us to disentangle i ntrinsic features from purely stochastic ones. The latter are the result of environmental changes due to a 'heat bath' acting on the many-asset system , quantitatively described in terms of a time dependent effective temperatu re. The remaining intrinsic properties can be widely investigated by applyi ng standard methods of classical many-body systems. As an example, we consi der a large set of stocks traded at the NYSE and determine the correspondin g asset-asset 'interaction' potential. In order to investigate in more deta il the cluster structure suggested by the short distance behavior of the in teraction potential, we perform a connectivity analysis of the spatial dist ribution of the particle system. In this way, we are able to draw conclusio ns on the intrinsic cluster persistency independent of the specific market conditions. (C) 2001 Elsevier Science B.V. All rights reserved.