IDEAS home Printed from https://ideas.repec.org/p/arx/papers/2306.04569.html
   My bibliography  Save this paper

Permutation invariant Gaussian matrix models for financial correlation matrices

Author

Listed:
  • George Barnes
  • Sanjaye Ramgoolam
  • Michael Stephanou

Abstract

We construct an ensemble of correlation matrices from high-frequency foreign exchange market data, with one matrix for every day for 446 days. The matrices are symmetric and have vanishing diagonal elements after subtracting the identity matrix. For this case, we construct the general permutation invariant Gaussian matrix model, which has 4 parameters characterised using the representation theory of symmetric groups. The permutation invariant polynomial functions of the symmetric, diagonally vanishing matrices have a basis labelled by undirected loop-less graphs. Using the expectation values of the general linear and quadratic permutation invariant functions of the matrices in the dataset, the 4 parameters of the matrix model are determined. The model then predicts the expectation values of the cubic and quartic polynomials. These predictions are compared to the data to give strong evidence for a good overall fit of the permutation invariant Gaussian matrix model. The linear, quadratic, cubic and quartic polynomial functions are then used to define low-dimensional feature vectors for the days associated to the matrices. These vectors, with choices informed by the refined structure of small non-Gaussianities, are found to be effective as a tool for anomaly detection in market states: statistically significant correlations are established between atypical days as defined using these feature vectors, and days with significant economic events as recognized in standard foreign exchange economic calendars. They are also shown to be useful as a tool for ranking pairs of days in terms of their similarity, yielding a strongly statistically significant correlation with a ranking based on a higher dimensional proxy for visual similarity.

Suggested Citation

  • George Barnes & Sanjaye Ramgoolam & Michael Stephanou, 2023. "Permutation invariant Gaussian matrix models for financial correlation matrices," Papers 2306.04569, arXiv.org.
  • Handle: RePEc:arx:papers:2306.04569
    as

    Download full text from publisher

    File URL: http://arxiv.org/pdf/2306.04569
    File Function: Latest version
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. M. Potters & J. P. Bouchaud & L. Laloux, 2005. "Financial Applications of Random Matrix Theory: Old Laces and New Pieces," Papers physics/0507111, arXiv.org.
    2. Aït-Sahalia, Yacine & Fan, Jianqing & Xiu, Dacheng, 2010. "High-Frequency Covariance Estimates With Noisy and Asynchronous Financial Data," Journal of the American Statistical Association, American Statistical Association, vol. 105(492), pages 1504-1517.
    3. Laurent Laloux & Pierre Cizeau & Marc Potters & Jean-Philippe Bouchaud, 2000. "Random Matrix Theory And Financial Correlations," International Journal of Theoretical and Applied Finance (IJTAF), World Scientific Publishing Co. Pte. Ltd., vol. 3(03), pages 391-397.
    4. Joël Bun & Jean-Philippe Bouchaud & Marc Potters, 2017. "Cleaning large correlation matrices: tools from random matrix theory," Post-Print hal-01491304, HAL.
    5. Maria Elvira Mancino & Paul Malliavin, 2002. "Fourier series method for measurement of multivariate volatilities," Finance and Stochastics, Springer, vol. 6(1), pages 49-61.
    6. D. Hendricks & T. Gebbie & D. Wilcox, 2016. "Detecting intraday financial market states using temporal clustering," Quantitative Finance, Taylor & Francis Journals, vol. 16(11), pages 1657-1678, November.
    7. Matteo Marsili, 2002. "Dissecting financial markets: Sectors and states," Papers cond-mat/0207156, arXiv.org.
    8. Matteo Marsili, 2002. "Dissecting financial markets: sectors and states," Quantitative Finance, Taylor & Francis Journals, vol. 2(4), pages 297-302.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Patrick Chang & Roger Bukuru & Tim Gebbie, 2019. "Revisiting the Epps effect using volume time averaging: An exercise in R," Papers 1912.02416, arXiv.org, revised Feb 2020.
    2. Patrick Chang & Etienne Pienaar & Tim Gebbie, 2020. "Detecting discrete processes with the Epps effect," Papers 2005.10568, arXiv.org, revised Dec 2024.
    3. Emmanuelle Jay & Thibault Soler & Eugénie Terreaux & Jean-Philippe Ovarlez & Frédéric Pascal & Philippe de Peretti & Christophe Chorro, 2019. "Improving portfolios global performance using a cleaned and robust covariance matrix estimate," Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) halshs-02354596, HAL.
    4. Christian Bongiorno & Damien Challet, 2020. "Nonparametric sign prediction of high-dimensional correlation matrix coefficients," Papers 2001.11214, arXiv.org.
    5. Desislava Chetalova & Rudi Schafer & Thomas Guhr, 2014. "Zooming into market states," Papers 1406.5386, arXiv.org.
    6. Joel Bun & Jean-Philippe Bouchaud & Marc Potters, 2016. "Cleaning large correlation matrices: tools from random matrix theory," Papers 1610.08104, arXiv.org.
    7. Emmanuelle Jay & Thibault Soler & Eugénie Terreaux & Jean-Philippe Ovarlez & Frédéric Pascal & Philippe De Peretti & Christophe Chorro, 2019. "Improving portfolios global performance using a cleaned and robust covariance matrix estimate," Documents de travail du Centre d'Economie de la Sorbonne 19022, Université Panthéon-Sorbonne (Paris 1), Centre d'Economie de la Sorbonne.
    8. Pharasi, Hirdesh K. & Seligman, Eduard & Sadhukhan, Suchetana & Majari, Parisa & Seligman, Thomas H., 2024. "Dynamics of market states and risk assessment," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 633(C).
    9. Emmanuelle Jay & Thibault Soler & Eugénie Terreaux & Jean-Philippe Ovarlez & Frédéric Pascal & Philippe de Peretti & Christophe Chorro, 2019. "Improving portfolios global performance using a cleaned and robust covariance matrix estimate," Post-Print halshs-02354596, HAL.
    10. Yelibi, Lionel & Gebbie, Tim, 2020. "Fast Super-Paramagnetic Clustering," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 551(C).
    11. López Pérez, Mario & Mansilla Corona, Ricardo, 2022. "Ordinal synchronization and typical states in high-frequency digital markets," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 598(C).
    12. Nobi, Ashadun & Maeng, Seong Eun & Ha, Gyeong Gyun & Lee, Jae Woo, 2014. "Effects of global financial crisis on network structure in a local stock market," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 407(C), pages 135-143.
    13. Teh, Boon Kin & Goo, Yik Wen & Lian, Tong Wei & Ong, Wei Guang & Choi, Wen Ting & Damodaran, Mridula & Cheong, Siew Ann, 2015. "The Chinese Correction of February 2007: How financial hierarchies change in a market crash," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 424(C), pages 225-241.
    14. Gautier Marti & Frank Nielsen & Philippe Donnat & S'ebastien Andler, 2016. "On clustering financial time series: a need for distances between dependent random variables," Papers 1603.07822, arXiv.org.
    15. Vincent Tan & Stefan Zohren, 2020. "Estimation of Large Financial Covariances: A Cross-Validation Approach," Papers 2012.05757, arXiv.org, revised Jan 2023.
    16. Emmanuelle Jay & Thibault Soler & Jean-Philippe Ovarlez & Philippe De Peretti & Christophe Chorro, 2019. "Robust covariance matrix estimation and portfolio allocation: the case of non-homogeneous assets," Documents de travail du Centre d'Economie de la Sorbonne 19023, Université Panthéon-Sorbonne (Paris 1), Centre d'Economie de la Sorbonne.
    17. Torsten Heinrich & Jangho Yang & Shuanping Dai, 2022. "Levels of structural change," Journal of Evolutionary Economics, Springer, vol. 32(1), pages 35-86, January.
    18. Mattia Guerini & Duc Thi Luu & Mauro Napoletano, 2023. "Synchronization patterns in the European Union," Applied Economics, Taylor & Francis Journals, vol. 55(18), pages 2038-2059, April.
    19. repec:hal:spmain:info:hdl:2441/5q8fnecj1u87ka099dc571bhi2 is not listed on IDEAS
    20. Liu, Cheng & Tang, Cheng Yong, 2014. "A quasi-maximum likelihood approach for integrated covariance matrix estimation with high frequency data," Journal of Econometrics, Elsevier, vol. 180(2), pages 217-232.
    21. Ogihara, Teppei & Yoshida, Nakahiro, 2014. "Quasi-likelihood analysis for nonsynchronously observed diffusion processes," Stochastic Processes and their Applications, Elsevier, vol. 124(9), pages 2954-3008.

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:arx:papers:2306.04569. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: arXiv administrators (email available below). General contact details of provider: http://arxiv.org/ .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.