Date Added: May 2011
The authors investigate financial market correlations using random matrix theory and principal component analysis. They use random matrix theory to demonstrate that correlation matrices of asset price changes contain structure that is incompatible with uncorrelated random price changes. They then identify the principal components of these correlation matrices and demonstrate that a small number of components accounts for a large proportion of the variability of the markets that they consider. They characterize the time-evolving relationships between the different assets by investigating the correlations between the asset price time series and principal components.