An empirical approach to financial crisis indicators based on random matrices

DOI10.1142/S021902491850022XMaRDI QIDQ4565074zbMATH OpenOpenAlexFDO

Authors Raphaël Douady, Antoine Kornprobst

Publication date 7 June 2018

Published in International Journal of Theoretical and Applied Finance (Search for Journal in Brave)

Full work available at URL https://arxiv.org/abs/1506.00806

zbMATH Keywords

forecastingfinancial crisessimulation methodsquantitative finance

Mathematics Subject Classification ID

Statistical methods; risk measures (91G70)

Abstract: The aim of this work is to build financial crisis indicators based on spectral properties of the dynamics of market data. After choosing an optimal size for a rolling window, the historical market data in this window is seen every trading day as a random matrix from which a covariance and a correlation matrix are obtained. The financial crisis indicators that we have built deal with the spectral properties of these covariance and correlation matrices and they are of two kinds. The first one is based on the Hellinger distance, computed between the distribution of the eigenvalues of the empirical covariance matrix and the distribution of the eigenvalues of a reference covariance matrix representing either a calm or agitated market. The idea behind this first type of indicators is that when the empirical distribution of the spectrum of the covariance matrix is deviating from the reference in the sense of Hellinger, then a crisis may be forthcoming. The second type of indicators is based on the study of the spectral radius and the trace of the covariance and correlation matrices as a mean to directly study the volatility and correlations inside the market. The idea behind the second type of indicators is the fact that large eigenvalues are a sign of dynamic instability. The predictive power of the financial crisis indicators in this framework is then demonstrated, in particular by using them as decision-making tools in a protective-put strategy.

Recommendations

• RANDOM MATRIX THEORY AND FINANCIAL CORRELATIONS
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Cites work

• Financial applications of random matrix theory: a short review
• Financial applications of random matrix theory: old laces and new pieces
• Random matrix application to correlations amongst the volatility of assets

Cited in

(7)

• A new attempt to identify long-term precursors for endogenous financial crises in the market correlation structures
• An approach for measuring corporation financial stability by econophysics and Bayesian method
• Quantifying interactions in nonlinear feedback dynamics: a time series analysis
• AN EXPERIMENT MODEL OF CHANCE DISCOVERY FOR VISUALIZING THE FINANCIAL SITUATION AND TREND
• Analyzing crisis in global financial indices
• Financial crisis dynamics: attempt to define a market instability indicator
• Crisis risk prediction with concavity from polymodel

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