Correlation network

March 22, 2011
By

(This article was first published on Quantitative thoughts » EN, and kindly contributed to R-bloggers)

I came up with an idea to draw correlation network to get a grasp about relationship between a list of stocks. An alternative way to show correlation matrix would be head map, which can have limitations with big matrices (>100).
Unfortunately,  ggplot2 package doesn’t have a easy way to draw the networks, so I was left with igraph or network. I tried both, but somehow chose igraph. If you want to master either package I highly recommend to start from theoretical part – it is very well written and it will save your time trying to understand the package’s conception.

Here is correlation matrix of stocks, which correlation coef. is more than 0.5:
correlation_network

?View Code RSPLUS
require(xts)
require(quantmod)
require(igraph)
cor_mat<- matrix( runif(100), nr=10 )
cor_mat[ lower.tri(cor_mat, diag=TRUE) ]<- 0
cor_mat[ abs(cor_mat) < 0.5]<- 0
 
graph <- graph.adjacency(cor_mat>0.5, weighted=TRUE, mode="upper")
E(graph)$weight<-t(cor_mat)[abs(t(cor_mat))>0.5]
E(graph)[ weight>0.7 ]$color <- "black" E(graph)[ weight>=0.65 &amp; weight<0.7 ]$color <- "red" E(graph)[ weight>=0.6 &amp;weight<0.65 ]$color <- "green" E(graph)[ weight>=0.55 &amp;weight<0.6 ]$color <- "blue"
E(graph)[ weight<0.55  ]$color <- "yellow"
V(graph)$label<- seq(1:10)#V(graph)$name
graph$layout <- layout.fruchterman.reingold
factor<-as.factor(cut(E(graph)$weight*10,c(4,5,6,7,8),labels=c(1,10,20,30))) png('corr_network.png',width=500) plot(decompose.graph(graph)[[which.max(sapply(decompose.graph(graph), vcount))]],edge.width =as.numeric(factor)*1.5,frame=T) legend("bottomleft", title="Colors", cex=0.75, pch=16, col=c("black", "blue","red", "green","pink"), legend=c(">70%", "65-70","60-65","55-60","50-55"), ncol=2)
dev.off()

The code can be found on github.

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