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Shrinkage and spectral filtering of correlation matrices: a comparison via the Kullback-Leibler distance

Author

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  • M. Tumminello
  • F. Lillo
  • R. N. Mantegna

Abstract

The problem of filtering information from large correlation matrices is of great importance in many applications. We have recently proposed the use of the Kullback-Leibler distance to measure the performance of filtering algorithms in recovering the underlying correlation matrix when the variables are described by a multivariate Gaussian distribution. Here we use the Kullback-Leibler distance to investigate the performance of filtering methods based on Random Matrix Theory and on the shrinkage technique. We also present some results on the application of the Kullback-Leibler distance to multivariate data which are non Gaussian distributed.

Suggested Citation

  • M. Tumminello & F. Lillo & R. N. Mantegna, 2007. "Shrinkage and spectral filtering of correlation matrices: a comparison via the Kullback-Leibler distance," Papers 0710.0576, arXiv.org.
    • Handle: RePEc:arx:papers:0710.0576
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    Cited by:

    1. Sandoval, Leonidas & Franca, Italo De Paula, 2012. "Correlation of financial markets in times of crisis," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 391(1), pages 187-208.
    2. Gautier Marti, 2019. "CorrGAN: Sampling Realistic Financial Correlation Matrices Using Generative Adversarial Networks," Papers 1910.09504, arXiv.org, revised Dec 2019.
    3. Leonidas Sandoval Junior & Italo De Paula Franca, 2011. "Correlation of financial markets in times of crisis," Papers 1102.1339, arXiv.org, revised Mar 2011.
    4. Contreras-Reyes, Javier E., 2014. "Asymptotic form of the Kullback–Leibler divergence for multivariate asymmetric heavy-tailed distributions," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 395(C), pages 200-208.
    5. Gautier Marti & Frank Nielsen & Philippe Donnat & S'ebastien Andler, 2016. "On clustering financial time series: a need for distances between dependent random variables," Papers 1603.07822, arXiv.org.
    6. Tumminello, Michele & Lillo, Fabrizio & Mantegna, Rosario N., 2010. "Correlation, hierarchies, and networks in financial markets," Journal of Economic Behavior & Organization, Elsevier, vol. 75(1), pages 40-58, July.
    7. R'emy Chicheportiche & Jean-Philippe Bouchaud, 2013. "A nested factor model for non-linear dependences in stock returns," Papers 1309.3102, arXiv.org.

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