Paper: arXiv 2601.06090

Authors: Maksym A. Girnyk

Abstract

Financial markets are complex adaptive systems characterized by collective behavior and abrupt regime shifts, particularly during crises. This paper studies time-varying dependencies in Nordic equity markets and examines whether correlation-eigenstructure dynamics can be exploited for regime-aware portfolio construction. Using two decades of daily data for the OMXS30, OMXC20, and OMXH25 universes, pronounced regime dependence in rolling correlation matrices is documented: crisis episodes are characterized by sharp increases in the leading eigenvalue and counter-cyclical behavior in the second eigenvalue. Eigenportfolio regressions further support a market-factor interpretation of the dominant eigenmode. Building on these findings, an adaptive portfolio allocation framework is proposed, combining correlation-matrix cleaning, an eigenvalue-ratio crisis indicator and long-only minimum-variance optimization with constraints that bound exposures to dominant eigenmodes. Backtesting results indicate improved downside protection and risk-adjusted performance during stress regimes, while remaining competitive with state-of-the-art benchmarks in tranquil periods.

Complexity vs Empirical Score

  • Math Complexity: 5.5/10
  • Empirical Rigor: 6.0/10 (capped from 7.5: transaction costs not modelled; see penalty flags)
  • Quadrant: Holy Grail — high math complexity, high empirical rigor

Why this score: The paper provides a solid empirical application of Random Matrix Theory and PCA to Nordic equity markets, proposing a practical regime-aware portfolio allocation framework. It combines rigorous backtesting across two decades of daily data with well-articulated quantitative methodology.

Research Flowchart

  flowchart TD
    A[Research Goal: Exploit correlation-eigenstructure for regime-aware portfolio allocation] --> B[Data Input: 20 years of daily data for OMXS30, OMXC20 & OMXH25]
    B --> C[Compute Rolling Correlation Matrices & Eigenstructure Dynamics]
    C --> D[Methodology: Apply Matrix Cleaning & Eigenvalue-Ratio Crisis Indicator]
    D --> E[Optimization: Constrained Long-Only Minimum-Variance Portfolio]
    E --> F[Key Outcome: Enhanced downside protection in crises & superior risk-adjusted returns]

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1 of 111 cited works are in the corpus; resolved via arXiv source bundles, Semantic Scholar and OpenAlex. Corpus-wide: 2518 linked papers.