SYSTEM AND METHOD FOR DISPLAYING AND ANALYZING FINANCIAL CORRELATION DATA

• US 20140214721A1
• Filed: 12/10/2013
• Published: 07/31/2014
• Est. Priority Date: 01/30/2013
• Status: Active Grant

• Current Assignee: The Capital Group Companies Incorporated (Morgan Stanley)
• Original Assignee: The Capital Group Companies Incorporated (Morgan Stanley)
• Inventors: Phoa, Wesley Kym-Son
• Granted Patent: US 9,098,877 B2
• Time in Patent Office: Days
• US Class Current: 705/36.R
• CPC Class Codes: G06Q 40/06 Asset management; Financial planning or analysis
• CPC Class Codes: G06T 11/203 Drawing of straight lines or curves

Abstract

A method for displaying a matrix of correlations or other statistical measures of co-movement associated with a plurality of financial instruments, portfolios, indices, or asset classes is disclosed. The method includes: converting the matrix of correlations or other co-movement measures into a probability transition matrix; defining a corresponding abstract distance measurement between any two of the plurality of financial instruments, portfolios, indices, or asset classes based on the probability transition matrix; assigning coordinates in a Euclidean space to each of the plurality of financial instruments, portfolios, indices, or asset classes, wherein a Euclidean distance between any two financial instruments, portfolios, indices, or asset classes in the Euclidean space corresponds to the corresponding abstract distance measurement; and displaying on a display device the plurality of financial instruments, portfolios, indices, or asset classes based on more significant dimensions of the Euclidean space.

Claims

1. A method for displaying a matrix of correlations of a plurality of financial instruments, portfolios, indices, or asset classes, the method comprising:

identifying by a processor the matrix of correlations;

converting by the processor the matrix of correlations into a probability transition matrix;

defining by the processor a corresponding abstract distance measurement between any two of the financial instruments, portfolios, indices, or asset classes based on the probability transition matrix;

assigning by the processor coordinates in a Euclidean space to each of the financial instruments, portfolios, indices, or asset classes corresponding to non-unit eigenvalues of the probability transition matrix, wherein a Euclidean distance between said any two of the financial instruments, portfolios, indices, or asset classes in the Euclidean space closely approximates the corresponding abstract distance measurement; and

displaying on a display device the financial instruments, portfolios, indices, or asset classes based on particular dimensions of the Euclidean space corresponding to larger ones of the eigenvalues.

2. The method of claim 1, wherein each of the correlations is derived from the standard correlation coefficient of a corresponding pair of the financial instruments, portfolios, indices, or asset classes.

3. The method of claim 2, wherein each of the correlations is one more than the standard correlation coefficient of the corresponding pair of the financial instruments, portfolios, indices, or asset classes.

4. The method of claim 1, wherein a number of the particular dimensions is three.

5. The method of claim 4, wherein the particular dimensions comprise the dimensions of the Euclidean space corresponding to the three largest ones of the eigenvalues.

6. The method of claim 4, wherein the displaying of the financial instruments, portfolios, indices, or asset classes comprises displaying an identifying label for each of the financial instruments, portfolios, indices, or asset classes in a 3-dimensional Euclidean representation on the display device.

7. The method of claim 6 further comprising modifying by the processor the 3-dimensional Euclidean representation on the display device in response to a user command.

8. The method of claim 6 further comprising displaying by the processor on the display device successive representations of correlation data as observed on successive dates.

9. The method of claim 6 further comprising adjusting by the processor a color or size of the identifying label to correspond to a respective value of an additional numerical characteristic being displayed in the 3-dimensional Euclidean representation on the display device for each of the financial instruments, portfolios, indices, or asset classes.

10. The method of claim 1, wherein a number of the particular dimensions is two.

11. The method of claim 10, wherein the particular dimensions comprise the dimensions of the Euclidean space corresponding to the two largest ones of the eigenvalues.

12. The method of claim 10, wherein the displaying of the financial instruments, portfolios, indices, or asset classes comprises displaying an identifying label for each of the financial instruments, portfolios, indices, or asset classes in a 2-dimensional Euclidean representation on the display device.

13. The method of claim 1 further comprising generating by the processor a measure of diversification of the financial instruments, portfolios, indices, or asset classes.

14. The method of claim 13, wherein the generating of the measure of diversification of the financial instruments, portfolios, indices, or asset classes comprises generating the measure of diversification using the particular dimensions of the Euclidean space.

15. The method of claim 13, wherein the measure of diversification comprises a global concentration, a relative global concentration, or a largest local concentration.

16. The method of claim 15, wherein

the measure of diversification comprises a global concentration;

the generating of the global concentration comprises;

assigning by the processor a weight to each of the financial instruments, portfolios, indices, or asset classes; and

weighting by the processor a contribution of each of the financial instruments, portfolios, indices, or asset classes by its respective said weight in the global concentration.

17. The method of claim 16 further comprising generating by the processor a portfolio diversification measure by:

identifying by the processor ones of the financial instruments, portfolios, indices, or asset classes;

assigning by the processor second weights to respective said ones of the financial instruments, portfolios, indices, or asset classes; and

generating by the processor the global concentration by only using the ones of the financial instruments, portfolios, indices, or asset classes in place of each of the financial instruments, portfolios, indices, or asset classes, and using the second weights in place of the weight of each of the financial instruments, portfolios, indices, or asset classes.

18. The method of claim 1 further comprising generating by the processor a sequence of successively less significant local concentrations of the financial instruments, portfolios, indices, or asset classes.

19. The method of claim 1 further comprising generating by the processor a plurality of relative local concentrations of the Euclidean space.

20. The method of claim 1 further comprising generating by the processor a numerical summary measure of accuracy with which the Euclidean distance as measured in the particular dimensions of the Euclidean space approximates the corresponding abstract distance measurement.

21. The method of claim 1 further comprising changing by the processor a sign of one of the coordinates for improving consistency of the displaying of the financial instruments, portfolios, indices, or asset classes over a period of time.

22. The method of claim 1 further comprising re-ordering by the processor the coordinates for improving consistency of the displaying of the financial instruments, portfolios, indices, or asset classes over a period of time.

23. The method of claim 1, wherein the financial instruments comprise publicly traded equity securities, publicly traded fixed income securities, publicly available mutual funds, exchange-traded funds, publicly traded currencies, exchange-traded futures, or options on exchange-traded futures.

24. The method of claim 1 further comprising:

in response to the displaying on the display device, receiving by the processor a user command to modify an attribute for a selected one of the financial instruments, portfolios, indices, or asset classes; and

modifying by the processor the attribute in response to the user command.

25. The method of claim 24, wherein the attribute corresponds to an investment amount.

26. The method of claim 1, wherein the correlations correspond to financial returns.

27. A system for displaying a matrix of correlations associated with a plurality of financial instruments, portfolios, indices, or asset classes, the system comprising:

a processor;

a display device coupled to the processor; and

a nonvolatile storage device coupled to the processor and storing instructions that, when executed by the processor, cause the processor to;

identify the matrix of correlations;

convert the matrix of correlations into a probability transition matrix;

define a corresponding abstract distance measurement between any two of the financial instruments, portfolios, indices, or asset classes based on the probability transition matrix;

assign coordinates in a Euclidean space to each of the financial instruments, portfolios, indices, or asset classes corresponding to non-unit eigenvalues of the probability transition matrix, wherein a Euclidean distance between said any two of the financial instruments, portfolios, indices, or asset classes in the Euclidean space closely approximates the corresponding abstract distance measurement; and

display on the display device the financial instruments, portfolios, indices, or asset classes based on particular dimensions of the Euclidean space corresponding to larger ones of the eigenvalues.

28. The system of claim 27, wherein a number of the particular dimensions is three.

29. The system of claim 28, wherein the instructions, when executed by the processor, further cause the processor to control the display device to display the financial instruments, portfolios, indices, or asset classes by displaying an identifying label for each of the financial instruments, portfolios, indices, or asset classes in a 3-dimensional Euclidean representation on the display device.

30. The system of claim 29, wherein the processor is further configured to receive a user command and the instructions, when executed by the processor, further cause the processor to modify the 3-dimensional Euclidean representation on the display device in response to the user command.