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"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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