Year: 2002
Type: article
Abstract: Diversification of an investment into independently fluctuating assets reduces its risk. In reality, movement of assets are are mutually correlated and therefore knowledge of cross--correlations among asset price movements are of great importance. Our results support the possibility that the problem of finding an investment in stocks which exposes invested funds to a minimum level of risk is analogous to the problem of finding the magnetization of a random magnet. The interactions for this ``random magnet problem'' are given by the cross-correlation matrix {\bf \sf C} of stock returns. We find that random matrix theory allows us to make an estimate for {\bf \sf C} which outperforms the standard estimate in terms of constructing an investment which carries a minimum level of risk.
Source: Europhysics Letters (EPL)
Authors: B Rosenow, V Plerou, P Gopikrishnan, H. E Stanley
Language: English
Subfield: Economics and Econometrics
Domain: Social Sciences
Open Access status: green
OpenAlex ID: W1996084872