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Random matrix theory and a definition of correlations in financial markets

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posted on 2017-12-06, 00:00 authored by Galina Korotkikh
Recent results based on Random Matrix Theory (RMT) suggest that commonly used methods to find correlations in financial markets are not adequate. They suggest that stocks may have collective behaviour that cannot be described by the classical approach. This raises doubts on the blind use of empirical variance-covariance matrices and needs a new understanding of correlations that goes beyond the linear one. This motivates us to propose a definition of correlations to describe and explain this collective behaviour. Computational experiments in the paper show that these correlations reproduce the character of the RTM results and reveal themselves by symmetries in eigenvector distributions of variance-covariance matrix.

Funding

Category 1 - Australian Competitive Grants (this includes ARC, NHMRC)

History

Editor

Pardalos PM; Tsitsiringos VK

Start Page

175

End Page

187

Number of Pages

13

ISBN-10

1402006403

Publisher

Kluwer

Place of Publication

Dordrecht, Netherlands

Open Access

  • No

External Author Affiliations

Faculty of Business and Informatics;

Era Eligible

  • No

Chapter Number

11

Number of Chapters

21

Parent Title

Financial engineering, e-commerce, and supply chain

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