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Portfolio Selection: An Approach from Random Matrix Theory

In: Advances in Quantitative Methods for Economics and Business

Author

Listed:
  • Laura Molero González

    (University of Almería)

  • Juan E. Trinidad Segovia

    (University of Almería)

  • Miguel A. Sánchez Granero

    (University of Almería)

  • Andrés García Medina

    (Center for Research in Mathematics)

Abstract

In the 1980s, the first doubts about the explanatory power of market beta in describing the cross-section of stocks returns began to appear. Since then, the financial literature has proposed a wide variety of new factors, even going so far as to speak of a phenomenon referred to as “zoo factor”. Many studies have focused on trying to determine the plausibility of these factors; however, all they have done is to determine the number of false discoveries. Random Matrix Theory (RMT) is presented as an optimal tool to be used in this field and is capable of providing a solution to the problem of the APT factors. In this chapter, we review the main asset pricing theories, along with alternative factor proposals in the financial literature. In addition, we present RMT and how it has been able to address this problem.

Suggested Citation

  • Laura Molero González & Juan E. Trinidad Segovia & Miguel A. Sánchez Granero & Andrés García Medina, 2025. "Portfolio Selection: An Approach from Random Matrix Theory," Springer Books, in: Salvador Cruz Rambaud & Juan Evangelista Trinidad Segovia & Catalina B. García-García (ed.), Advances in Quantitative Methods for Economics and Business, chapter 0, pages 199-224, Springer.
    • Handle: RePEc:spr:sprchp:978-3-031-84782-0_10
    DOI: 10.1007/978-3-031-84782-0_10
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