The fine structure of spectral properties for random correlation matrices: an application to financial markets
AbstractWe study some properties of eigenvalue spectra of financial correlation matrices. In particular, we investigate the nature of the large eigenvalue bulks which are observed empirically, and which have often been regarded as a consequence of the supposedly large amount of noise contained in financial data. We challenge this common knowledge by acting on the empirical correlation matrices of two data sets with a filtering procedure which highlights some of the cluster structure they contain, and we analyze the consequences of such filtering on eigenvalue spectra. We show that empirically observed eigenvalue bulks emerge as superpositions of smaller structures, which in turn emerge as a consequence of cross-correlations between stocks. We interpret and corroborate these findings in terms of factor models, and and we compare empirical spectra to those predicted by Random Matrix Theory for such models.
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Bibliographic InfoPaper provided by arXiv.org in its series Papers with number 1102.4076.
Date of creation: Feb 2011
Date of revision:
Publication status: Published in Phys. Rev. E 84, 016113 (2011)
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Other versions of this item:
- Livan, Giacomo & Alfarano, Simone & Scalas, Enrico, 2011. "The fine structure of spectral properties for random correlation matrices: an application to financial markets," MPRA Paper 28964, University Library of Munich, Germany.
- C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation
- G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
- C01 - Mathematical and Quantitative Methods - - General - - - Econometrics
This paper has been announced in the following NEP Reports:
- NEP-ALL-2011-03-05 (All new papers)
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