Using topological data analysis (TDA) and persistent homology to analyze the stock markets in Singapore and Taiwan

• Main Authors: Yen, Peter Tsung-Wen, Cheong, Siew Ann
• Other Authors: School of Physical and Mathematical Sciences
• Format: Article
• Language: English
• Published: 2022
• Subjects: Science::Physics; Topological Data Analysis; Econophysics; Applied Topology; Financial Markets; Straits Times Index; Taiwan Capitalization Weighted Stock Index
• Online Access: https://hdl.handle.net/10356/155402
• Institution: Nanyang Technological University

In recent years, persistent homology (PH) and topological data analysis (TDA) have gained increasing attention in the fields of shape recognition, image analysis, data analysis, machine learning, computer vision, computational biology, brain functional networks, financial networks, haze detection, etc. In this article, we will focus on stock markets and demonstrate how TDA can be useful in this regard. We first explain signatures that can be detected using TDA, for three toy models of topological changes. We then showed how to go beyond network concepts like nodes (0-simplex) and links (1-simplex), and the standard minimal spanning tree or planar maximally filtered graph picture of the cross correlations in stock markets, to work with faces (2-simplex) or any k-dim simplex in TDA. By scanning through a full range of correlation thresholds in a procedure called filtration, we were able to examine robust topological features (i.e. less susceptible to random noise) in higher dimensions. To demonstrate the advantages of TDA, we collected time-series data from the Straits Times Index and Taiwan Capitalization Weighted Stock Index (TAIEX), and then computed barcodes, persistence diagrams, persistent entropy, the bottleneck distance, Betti numbers, and Euler characteristic. We found that during the periods of market crashes, the homology groups become less persistent as we vary the characteristic correlation. For both markets, we found consistent signatures associated with market crashes in the Betti numbers, Euler characteristics, and persistent entropy, in agreement with our theoretical expectations.