arXiv subjects

Heather J. Ruskin

Publications and source records attributed to Heather J. Ruskin.

4 recordsLinked to original sources

arXiv2010

Random Matrix Theory and Fund of Funds Portfolio Optimisation

The proprietary nature of Hedge Fund investing means that it is common practise for managers to release minimal information about their returns. The construction of a Fund of Hedge Funds portfolio requires a correlation matrix which often has to be estimated using a relatively small sample of monthly returns data which induces noise. In this paper random matrix theory (RMT) is applied to a cross-correlation matrix C, constructed using hedge fund returns data. The analysis reveals a number of eigenvalues that deviate from the spectrum suggested by RMT. The components of the deviating eigenvectors are found to correspond to distinct groups of strategies that are applied by hedge fund managers. The Inverse Participation ratio is used to quantify the number of components that participate in each eigenvector. Finally, the correlation matrix is cleaned by separating the noisy part from the non-noisy part of C. This technique is found to greatly reduce the difference between the predicted and realised risk of a portfolio, leading to an improved risk profile for a fund of hedge funds.

q-fin.ST↗

arXiv2010

Cross-Correlation Dynamics in Financial Time Series

The dynamics of the equal-time cross-correlation matrix of multivariate financial time series is explored by examination of the eigenvalue spectrum over sliding time windows. Empirical results for the S&P 500 and the Dow Jones Euro Stoxx 50 indices reveal that the dynamics of the small eigenvalues of the cross-correlation matrix, over these time windows, oppose those of the largest eigenvalue. This behaviour is shown to be independent of the size of the time window and the number of stocks examined. A basic one-factor model is then proposed, which captures the main dynamical features of the eigenvalue spectrum of the empirical data. Through the addition of perturbations to the one-factor model, (leading to a 'market plus sectors' model), additional sectoral features are added, resulting in an Inverse Participation Ratio comparable to that found for empirical data. By partitioning the eigenvalue time series, we then show that negative index returns, (drawdowns), are associated with periods where the largest eigenvalue is greatest, while positive index returns, (drawups), are associated with periods where the largest eigenvalue is smallest. The study of correlation dynamics provides some insight on the collective behaviour of traders with varying strategies.

q-fin.ST↗

arXiv2010

Multiscaled Cross-Correlation Dynamics in Financial Time-Series

The cross correlation matrix between equities comprises multiple interactions between traders with varying strategies and time horizons. In this paper, we use the Maximum Overlap Discrete Wavelet Transform to calculate correlation matrices over different timescales and then explore the eigenvalue spectrum over sliding time windows. The dynamics of the eigenvalue spectrum at different times and scales provides insight into the interactions between the numerous constituents involved. Eigenvalue dynamics are examined for both medium and high-frequency equity returns, with the associated correlation structure shown to be dependent on both time and scale. Additionally, the Epps effect is established using this multivariate method and analyzed at longer scales than previously studied. A partition of the eigenvalue time-series demonstrates, at very short scales, the emergence of negative returns when the largest eigenvalue is greatest. Finally, a portfolio optimization shows the importance of timescale information in the context of risk management.

q-fin.ST↗

arXiv2006

Long-term memory in the Irish market (ISEQ): evidence from wavelet analysis

Researchers have used many different methods to detect the possibility of long-term dependence (long memory) in stock market returns, but evidence is in general mixed. In this paper, three different tests, (namely Rescaled Range (R/S), its modified form, and the semi-parametric method (GPH)), in addition to a new approach using the discrete wavelet transform, (DWT), have been applied to the daily returns of five Irish Stock Exchange (ISEQ) indices. These methods have also been applied to the volatility measures (namely absolute and squared returns). The aim is to investigate the existence of long-term memory properties. The indices are Overall, Financial, General, Small Cap and ITEQ and the results of these approaches show that there is no evidence of long-range dependence in the returns themselves, while there is strong evidence for such dependence in the squared and absolute returns. Moreover, the discrete wavelet transform (DWT) provides additional insight on the series breakdown. In particular, in comparison to other methods, the benefit of the wavelet transform is that it provides a way to study the sensitivity of the series to increases in amplitude of fluctuations as well as changes in frequency. Finally, based on results for these methods, in particular, those for DWT of raw (or original), squared and absolute returns, it can be concluded that there is strong indication for persistence in the volatilities of the emerging stock market returns for the Irish data.

physics.data-an↗