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An analysis of Cross-correlations in South African Market data

Diane Wilcox·Tim Gebbie
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Abstract

We apply random matrix theory to compare correlation matrix estimators C obtained from emerging market data. The correlation matrices are constructed from 10 years of daily data for stocks listed on the Johannesburg Stock Exchange (JSE) from January 1993 to December 2002. We test the spectral properties of C against random matrix predictions and find some agreement between the distributions of eigenvalues, nearest neighbour spacings, distributions of eigenvector components and the inverse participation ratios for eigenvectors. We show that interpolating both missing data and illiquid trading days with a zero-order hold increases agreement with RMT predictions. For the more realistic estimation of correlations in an emerging market, we suggest a pairwise measured-data correlation matrix. For the data set used, this approach suggests greater temporal stability for the leading eigenvectors. An interpretation of eigenvectors in terms of trading strategies is given in lieu of classification by economic sectors.

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Diane Wilcox, Tim Gebbie. 2006-09-26. An analysis of Cross-correlations in South African Market data. https://doi.org/10.1016/j.physa.2006.10.030

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