Complex market dynamics in the light of random matrix theory

DOI10.1007/978-3-030-11364-3_2zbMATH Open1418.91635arXiv1809.07100OpenAlexW2890593735MaRDI QIDQ5227350FDOQ5227350

Hirdesh K. Pharasi, T. H. Seligman, Kiran Sharma, Anirban Chakraborti

Publication date: 26 July 2019

Published in: New Economic Windows (Search for Journal in Brave)

Abstract: We present a brief overview of random matrix theory (RMT) with the objectives of highlighting the computational results and applications in financial markets as complex systems. An oft-encountered problem in computational finance is the choice of an appropriate epoch over which the empirical cross-correlation return matrix is computed. A long epoch would smoothen the fluctuations in the return time series and suffers from non-stationarity, whereas a short epoch results in noisy fluctuations in the return time series and the correlation matrices turn out to be highly singular. An effective method to tackle this issue is the use of the power mapping, where a non-linear distortion is applied to a short epoch correlation matrix. The value of distortion parameter controls the noise-suppression. The distortion also removes the degeneracy of zero eigenvalues. Depending on the correlation structures, interesting properties of the eigenvalue spectra are found. We simulate different correlated Wishart matrices to compare the results with empirical return matrices computed using the S&P 500 (USA) market data for the period 1985-2016. We also briefly review two recent applications of RMT in financial stock markets: (i) Identification of "market states" and long-term precursor to a critical state; (ii) Characterization of catastrophic instabilities (market crashes).

Full work available at URL: https://arxiv.org/abs/1809.07100

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Mathematics Subject Classification ID

Economic time series analysis (91B84) Random matrices (probabilistic aspects) (60B20) Actuarial science and mathematical finance (91G99)

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• Quasi-stationary states in temporal correlations for traffic systems: Cologne orbital motorway as an example
• Collective behavior in the North Rhine-Westphalia motorway network
• Macroeconomic and Financial Networks: Review of Some Recent Developments in Parametric and Non-parametric Approaches
• Identifying subdominant collective effects in a large motorway network

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