Random Matrix Theory and Macro-Economic Time-Series: An Illustration Using the Evolution of Business Cycle Synchronisation, 1886-2006
The aim of this paper is to show that random matrix theory (RMT) can be a useful addition to the economist?s tool-kit in the analysis of macro-economic time series data. A great deal of applied economic work relies upon empirical estimates of the correlation matrix. However due to the finite size of both the number of variables and the number of observations, a reliable determination of the correlation matrix may prove to be problematic. The structure of the correlation matrix may be dominated by noise rather than by true information. Random matrix theory was developed in physics to overcome this problem, and to enable true information in a matrix to be distinguished from noise. There is now a large literature in which it is applied successfully to financial markets and in particular to portfolio selection. The author illustrates the application of the technique to macro-economic time-series data. Specifically, the evolution of the convergence of the business cycle between the capitalist economies from the late 19th century to 2006. The results are not in sharp contrast with those in the literature obtained using approaches with which economists are more familiar. However, there are differences, which RMT enables us to clarify.
Volume (Year): 2 (2008)
Issue (Month): ()
|Contact details of provider:|| Postal: Kiellinie 66, D-24105 Kiel|
Phone: +49 431 8814-1
Fax: +49 431 8814528
Web page: http://www.economics-ejournal.org/
More information through EDIRC
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- R. Mantegna, 1999.
"Hierarchical structure in financial markets,"
The European Physical Journal B: Condensed Matter and Complex Systems,
Springer;EDP Sciences, vol. 11(1), pages 193-197, September.
- R. Mantegna, 1999. "Hierarchical structure in financial markets," The European Physical Journal B: Condensed Matter and Complex Systems, Springer;EDP Sciences, vol. 11(1), pages 193-197, September.
- Rosario N. Mantegna, 1998. "Hierarchical Structure in Financial Markets," Papers cond-mat/9802256, arXiv.org.
- Martins, André C.R., 2007. "Random, but not so much a parameterization for the returns and correlation matrix of financial time series," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 383(2), pages 527-532.
- Plerou, V & Gopikrishnan, P & Rosenow, B & Amaral, L.A.N & Stanley, H.E, 2000. "A random matrix theory approach to financial cross-correlations," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 287(3), pages 374-382.
- Michael D. Bordo & Thomas Helbling, 2003. "Have National Business Cycles Become More Synchronized?," NBER Working Papers 10130, National Bureau of Economic Research, Inc.
- Andre C. R. Martins, 2007. "Random, but not so much: A parameterization for the returns and correlation matrix of financial time series," Papers physics/0701025, arXiv.org.
- Ormerod, Paul & Mounfield, Craig, 2000. "Random matrix theory and the failure of macro-economic forecasts," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 280(3), pages 497-504. Full references (including those not matched with items on IDEAS)
When requesting a correction, please mention this item's handle: RePEc:zbw:ifweej:7374. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (ZBW - German National Library of Economics)
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.