An empirical approach to financial crisis indicators based on random matrices

Raphael Douady () and Antoine Kornprobst ()
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Antoine Kornprobst: CES - Centre d'économie de la Sorbonne - UP1 - Université Paris 1 Panthéon-Sorbonne - CNRS - Centre National de la Recherche Scientifique

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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: 2018-06
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Citations: View citations in EconPapers (4)

Published in International Journal of Theoretical and Applied Finance, 2018, 21 (03), pp.1850022. ⟨10.1142/S021902491850022X⟩

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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 (2017)
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Persistent link: https://EconPapers.repec.org/RePEc:hal:journl:hal-03265045

DOI: 10.1142/S021902491850022X

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