The Effects of Market Properties on Portfolio Diversification in the Korean and Japanese Stock Markets

TL;DR

This paper empirically examines how market properties influence portfolio diversification in Korean and Japanese stock markets, highlighting the negative relationship and proposing the use of random matrix theory to improve portfolio management.

Contribution

It introduces the application of random matrix theory to control correlation matrices, enhancing portfolio diversification strategies based on empirical market property analysis.

Findings

Negative relationship between market properties and diversification degree

Random matrix theory can effectively control correlation matrices

Improved portfolio management potential through new correlation control methods

Abstract

In this study, we have investigated empirically the effects of market properties on the degree of diversification of investment weights among stocks in a portfolio. The weights of stocks within a portfolio were determined on the basis of Markowitz's portfolio theory. We identified that there was a negative relationship between the influence of market properties and the degree of diversification of the weights among stocks in a portfolio. Furthermore, we noted that the random matrix theory method could control the properties of correlation matrix between stocks; this may be useful in improving portfolio management for practical application.