Tyler's M-Estimator, Random Matrix Theory, and Generalized Elliptical Distributions with Applications to Finance

In recent publications standard methods of random matrix theory have been applied to principal components analysis of high-dimensional financial data. We discuss the fundamental results and potential shortcomings of random matrix theory in the light of the stylized facts of empirical finance. It is shown that the Marcenko-Pastur law generally fails when analyzing the empirical distribution function of the eigenvalues given by the sample covariance matrix of generalized elliptically distributed data. As an alternative we derive a random matrix referred to as the 'spectral estimator' which is distribution-free within the class of generalized elliptical distributions. We show that the spectral estimator corresponds to Tyler's M-estimator. Substituting the sample covariance matrix by the spectral estimator resolves the problems which are due to the stylized facts and the Marcenko-Pastur law remains valid. This holds even if the data are not generalized elliptically distributed but mutually independent