Econophysics - Financial Correlations
and Portfolio Optimization

Professor Thomas Guhr, Mathematical Physics, Lund University

Tuesday, November 15th 2005, 15.15

Lecture room F, Theoretical Physics, Sölvegatan 14A

Abstract:
In the last ten to fifteen years, econophysics developed as a quickly
growing field in statistical physics. I give a brief introduction by
discussing financial risk management and portfolio optimization. The
importance of financial correlations is explained, leading to the
concept of diversification.  The correlation coefficients measured
from the recorded time series of the stock prices are often
unreliable, because the true correlations are noise-dressed. It was a
big step forward when physicists considerably improved the estimation
of this noise.  Econophysicists invent new and urgently needed
methods to reduce the noise in portfolio optimization. Two
conceptually very different methods, the filtering and the power
mapping, are presented. Real stock market data are used to show how
the noise reduction improves the portfolios.