Random Matrix Theory Analysis of Bank Stocks in Nigeria and Use of Implied Volatility in Risk Management
T.C. Urama
Abstract
This paper examines cross-correlation matrix C of stock index returns obtained from Nigerian banking sector for the period 2009 to 2021 using the concept of Random Matrix Theory. The eigenvalues of the empirical correlation matrix are tested and their respective eigenvectors used to determine which bank(s) that drive the financial sector of the Nigerian Stock Market (NSM) through an analysis of their inverse participation ratios. It was observed that there are predominantly positive correlation among the respective stocks, meaning that individual stocks move in the same direction, hence diversification of assets in the banking sector may not be an optimal strategy except for Unity and Union bank stocks that have negative correlation with most of other bank stocks. To this end, and taking cognizance of the fact that Nigeria is yet to commence full trading on derivative products, hence no data yet on derivative trade in Nigeria, we try to estimate the realistic implied correlation matrix from some hypothetical option prices for some assets listed in the NSM as demonstration of ways to diversify assets through the use of derivatives. Finally, in this work we derive Marcento-Pastur law in the appendix.
Full Text: PDF DOI: 10.15640/arms.v11n2a1
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