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Applications of random-matrix theory and nonparametric change-point analysis to three notable systemic crises

  • Received: 28 November 2017 Accepted: 22 April 2018 Published: 11 June 2018
  • JEL Codes: C1, F4, G1

  • This paper studies association between changes in absorption ratio and aggregate market returns in three systemic crises across a broad class of assets. Time series of normalized eigenvalue estimates reveal that crises are characterized by a general breakdown of correlation structure. The structure of return correlations is nonlinear and nonstationary across di erent asset groups. So we introduce a nonparametric technique to monitor divergence in distributions underlying successive observations of normalized dominant eigenvalue of the returns. Periods of high divergence imply a change in the correlation structure of asset returns. They are found to either precede or coincide with systemic shocks. An additional parametric analysis is provided as an informal check on the results obtained in the paper.

    Citation: David Melkuev, Danqiao Guo, Tony S. Wirjanto. Applications of random-matrix theory and nonparametric change-point analysis to three notable systemic crises[J]. Quantitative Finance and Economics, 2018, 2(2): 413-467. doi: 10.3934/QFE.2018.2.413

    Related Papers:

  • This paper studies association between changes in absorption ratio and aggregate market returns in three systemic crises across a broad class of assets. Time series of normalized eigenvalue estimates reveal that crises are characterized by a general breakdown of correlation structure. The structure of return correlations is nonlinear and nonstationary across di erent asset groups. So we introduce a nonparametric technique to monitor divergence in distributions underlying successive observations of normalized dominant eigenvalue of the returns. Periods of high divergence imply a change in the correlation structure of asset returns. They are found to either precede or coincide with systemic shocks. An additional parametric analysis is provided as an informal check on the results obtained in the paper.


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