AN EMPIRICAL APPROACH TO FINANCIAL CRISIS INDICATORS BASED ON RANDOM MATRICES

Raphael Douady () and Antoine Kornprobst ()
Additional contact information
Antoine Kornprobst: #x2020;Centre d’Economie de la Sorbonne, 106 - 112 Boulevard de l’Hôpital, Paris 75013, France

International Journal of Theoretical and Applied Finance (IJTAF), 2018, vol. 21, issue 03, 1-22

Abstract: The aim of this work is to build a class of financial crisis indicators based on the spectral properties of the dynamics of market data. After choosing an appropriate size for a rolling window, the historical market data inside this rolling window are seen every trading day as a random matrix from which a correlation matrix is obtained. Our goal is to study the correlations between the assets that constitute this market and look for reproducible patterns that are indicative of an impending financial crisis. A weighting of the assets in the market is then introduced and is proportional to the daily traded volumes. This manipulation is realized in order to give more importance to the most liquid assets. Our financial crisis indicators are based on the spectral radius of this weighted correlation matrix. The idea behind this type of financial crisis indicators is that large eigenvalues are a sign of dynamic instability. The out-of-sample 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.

Keywords: Quantitative finance; simulation methods; forecasting; financial crises (search for similar items in EconPapers)
Date: 2018
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

Downloads: (external link)
http://www.worldscientific.com/doi/abs/10.1142/S021902491850022X
Access to full text is restricted to subscribers

Related works:
Working Paper: An empirical approach to financial crisis indicators based on random matrices (2018)
Working Paper: An empirical approach to financial crisis indicators based on random matrices (2018)
Working Paper: An Empirical Approach to Financial Crisis Indicators Based on Random Matrices (2017)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:wsi:ijtafx:v:21:y:2018:i:03:n:s021902491850022x

Ordering information: This journal article can be ordered from

DOI: 10.1142/S021902491850022X

Access Statistics for this article

International Journal of Theoretical and Applied Finance (IJTAF) is currently edited by L P Hughston

More articles in International Journal of Theoretical and Applied Finance (IJTAF) from World Scientific Publishing Co. Pte. Ltd.
Bibliographic data for series maintained by Tai Tone Lim ().