siloqy/docs/Claude-Market Regime Detection Algorithm.md

Market Regime Detection Algorithm

Created: 8/11/2025 12:54
Updated: 8/11/2025 12:55
Exported: 8/28/2025 22:09
Link: https://claude.ai/chat/9450955e-9d56-427a-88de-e4c0da98ba27

Prompt:

11/8/2025, 12:54:08

File: Dolphin_System_General_Architechture_Rev1.00.md

File: Pairwise Correlation Regime Detection Academic Analysis Enhancement Framework.txt

File: Price_component_Market_Regime_Detection_Algorithm.md

Also consider these documents, describing the Algorithm.-

Response:

11/8/2025, 12:54:58

Thought process: Decoded market regime detection algorithm's intricate computational strategy.

Looking at the provided documents, I need to analyze the core algorithm described for market regime detection. Let me identify the key components:

1. The system takes a universe of cryptocurrency tokens/assets
2. Computes pairwise correlations between all assets
3. Ranks pairs from least to most correlated
4. Removes perfectly correlated pairs (1.0 correlation)
5. Applies exponential weighting (lambda=0.94) to prioritize least correlated pairs
6. Calculates regime based on weighted bull vs bear pair ratios

The documents show this is implemented in:
- `processing_loop.py` - orchestrates the entire system
- `correlation_calculator.py` - calculates pairwise correlations
- `exponential_weighting.py` - applies exponential weighting to pairs
- `statistical_validation.py` - optional validation layer
- `market_regime_detection.py` - final regime classification
- `multi_exchange_data_fetcher.py` - fetches real market data

Key workflow from `processing_loop.py`:
1. Fetch market data (real or mock)
2. Calculate returns data
3. Run correlation calculation
4. Apply statistical validation (optional)
5. Apply exponential weighting
6. Run regime detection
7. Optional ensemble classifier

The algorithm classifies regimes as:
- Bull: >60% of weighted pairs trending up
- Bear: >60% of weighted pairs trending down  
- Sideways: Neither threshold met
- Transition: High volatility/mixed signals

The academic documents validate this approach and suggest enhancements like VIX integration, multi-timeframe analysis, and ensemble methods.

Based on my analysis of the provided documents, here's a comprehensive overview of the Market Regime Detection algorithm:

Core Algorithm Overview

The system implements a pairwise correlation-based regime detection algorithm with the following key steps:

1. Data Collection & Processing

• Universe Selection: Takes a configurable list of cryptocurrency assets (default: top 20-200 cryptos)
• Data Fetching: Uses MultiExchangeDataFetcherBlock to fetch OHLCV data from multiple exchanges (Binance, Kraken, Coinbase)
• Returns Calculation: Converts price data to returns for correlation analysis

2. Correlation Analysis (correlation_calculator.py)

• Pairwise Calculation: Computes Pearson correlations for all unique asset pairs
• Matrix Generation: Creates full correlation matrix using statistics.correlation()
• Pair Ranking: Sorts pairs by absolute correlation (least to most correlated)
• Perfect Correlation Removal: Excludes pairs with |correlation| ≥ 0.999

3. Exponential Weighting (exponential_weighting.py)

• Weight Application: Uses λ^rank weighting (default λ=0.94)
• Prioritization: Gives higher weights to least correlated pairs
• Volatility Adjustment: Optional adjustment based on correlation volatility
• Normalization: Ensures weights sum to 1.0

4. Regime Classification (market_regime_detection.py)

• Trend Analysis: Classifies each symbol as bull (>1% avg return) or bear (<-1% avg return)
• Weighted Voting: Calculates weighted percentage of bull vs bear pairs
• Regime Decision:
  • Bull: >60% weighted pairs bullish
  • Bear: >60% weighted pairs bearish
  • Sideways: Neither threshold met
  • Transition: High volatility + mixed signals

5. Optional Enhancements

• Statistical Validation: Significance testing, confidence intervals
• Ensemble Classifier: ML models (Random Forest, XGBoost) for enhanced accuracy
• Multi-timeframe Analysis: Different correlation windows for various perspectives

Key Implementation Details

Processing Flow (processing_loop.py)

# Simplified workflow
1. Fetch market data → 
2. Extract returns → 
3. Calculate correlations → 
4. Apply exponential weighting → 
5. Detect regime → 
6. Broadcast results

Critical Parameters

• Correlation Window: 20-50 periods (default: 20)
• Lambda (λ): 0.94 for exponential decay
• Bull Threshold: 60% of weighted pairs
• Bear Threshold: 60% of weighted pairs
• Transition Volatility: 30% threshold

Algorithm Strengths

1. Mathematically Sound: Prioritizing least correlated pairs captures diversification breakdown
2. Computationally Efficient: O(n²) complexity for correlations, suitable for real-time
3. Interpretable: Clear relationship between correlations and regime
4. Adaptive: Exponential weighting responds to recent market changes

Academic Validation

The documents confirm this approach aligns with:

• Pelletier (2006): Pairwise correlations outperform univariate methods
• Preis et al. (2012): Correlation breakdown signals market stress
• Random Matrix Theory: Filtering perfect correlations removes noise

Recommended Enhancements

1. VIX Integration: Add volatility index for 25-35% better crisis detection
2. Multi-timeframe: Wavelet decomposition for frequency analysis
3. Dynamic Thresholds: Adjust bull/bear thresholds based on market volatility
4. Market Cap Weighting: Prioritize large-cap cryptocurrencies for stability

The system is well-architected with modular blocks that can be independently tested and enhanced. The exponential weighting approach (λ=0.94) is academically validated as superior to logarithmic weighting for financial applications.

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