Market instability increases market factor influence:
Stocks move more in sync with the market during crises.
Diversification weakens during market crises:
Even in Markowitz optimal portfolios, allocation becomes concentrated in fewer stocks.
RMT-based portfolio advantages:
Controlling for market factors increases diversification.
Lower risk than traditional Markowitz portfolios.
Eigenvalue relationship in Japan:
Larger eigenvalues → Higher IPC (+96.58%) → Lower CC (-73.84%).
As market influence grows, diversification weakens.
Opinion
This study provides strong empirical evidence that traditional Markowitz portfolios lose their diversification benefits during crises.
By applying RMT, investors can mitigate market factor influence and maintain portfolio balance even in volatile conditions.
These findings suggest that RMT-based portfolio construction is a promising risk management tool, particularly during periods of heightened market stress.
Core Sell Point
As market volatility rises, portfolios become more concentrated.
Using RMT can remove market factor influence, improving portfolio diversification and risk management.
"The Effects of Market Properties on Portfolio Diversification in the Korean and Japanese Stock Markets" This study empirically examines how market properties affect portfolio diversification in the Korean and Japanese stock markets.
1. Research Objectives
Analyze whether the degree of diversification in Markowitz portfolios is influenced by market properties.
Explore whether Random Matrix Theory (RMT) can improve portfolio management by controlling for market-driven correlations.
2. Research Methodology
Used KOSPI 200 stock data (Jan 1980 - Jun 2015) and Nikkei 225 stock data (Jan 1983 - Dec 2000).
Included periods of market crashes to assess the impact of crises.
Collected returns, market capitalization, and investor trading data.
Compared correlation matrices with and without market factor control using RMT.
Measured intra-portfolio correlation (IPC) and concentration coefficient (CC) to assess diversification.
3. Key Findings
1.Market factor influence increases during crises:
Empirical evidence shows that during market instability, stocks move more in sync with the overall market rather than independently.
2.Diversification decreases in volatile markets:
When market factor influence is strong, Markowitz optimal portfolios become more concentrated in fewer stocks.
This suggests that diversification weakens during periods of high market uncertainty.
3.RMT-based portfolios improve diversification:
Removing market-driven correlations using RMT results in better portfolio diversification.
RMT-based portfolios exhibit lower risk than traditional Markowitz portfolios, highlighting RMT’s potential to enhance portfolio theory.
4.Eigenvalue analysis in Japan’s stock market:
The largest eigenvalue was positively correlated (96.58%) with IPC and negatively correlated (-73.84%) with CC.
This means that as market factor influence grows, portfolio diversification weakens.
Conclusion
This study confirms that as market factor influence grows, portfolio diversification declines. Using RMT to control market-driven correlations improves portfolio diversification, making it an effective tool for addressing the limitations of traditional portfolio theory. The findings suggest that RMT-based portfolio construction may be particularly useful in high-volatility environments.
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