Levy Matrices and Financial Covariances

Z. Burda; J. Jurkiewicz; M. A. Nowak; G. Papp; I. Zahed

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arXiv · cond-mat/0103108

Levy Matrices and Financial Covariances

Z. Burda·J. Jurkiewicz·M. A. Nowak·G. Papp·I. Zahed

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Abstract

In a given market, financial covariances capture the intra-stock correlations and can be used to address statistically the bulk nature of the market as a complex system. We provide a statistical analysis of three SP500 covariances with evidence for raw tail distributions. We study the stability of these tails against reshuffling for the SP500 data and show that the covariance with the strongest tails is robust, with a spectral density in remarkable agreement with random Levy matrix theory. We study the inverse participation ratio for the three covariances. The strong localization observed at both ends of the spectral density is analogous to the localization exhibited in the random Levy matrix ensemble. We discuss two competitive mechanisms responsible for the occurrence of an extensive and delocalized eigenvalue at the edge of the spectrum: (a) the Levy character of the entries of the correlation matrix and (b) a sort of off-diagonal order induced by underlying inter-stock correlations. (b) can be destroyed by reshuffling, while (a) cannot. We show that the stocks with the largest scattering are the least susceptible to correlations, and likely candidates for the localized states. We introduce a simple model for price fluctuations which captures behavior of the SP500 covariances. It may be of importance for assets diversification.

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Z. Burda, J. Jurkiewicz, M. A. Nowak, G. Papp, I. Zahed. 2001-03-05. Levy Matrices and Financial Covariances. https://arxiv.org/abs/cond-mat/0103108

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