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Asset allocation: new evidence through network approaches

  • Gian Paolo ClementeEmail author
  • Rosanna Grassi
  • Asmerilda Hitaj
S.I.: Recent Developments in Financial Modeling and Risk Management
  • 45 Downloads

Abstract

The main contribution of the paper is to unveil the role of the network structure in the financial markets to improve the portfolio selection process, where nodes indicate securities and edges capture the dependence structure of the system. Three different methods are proposed in order to extract the dependence structure between assets in a network context. Starting from this modified structure, we formulate and then we solve the asset allocation problem. We find that the optimal portfolios obtained through a network-based approach are composed mainly of peripheral assets, which are poorly connected with the others. These portfolios, in the majority of cases, are characterized by an higher trade-off between performance and risk with respect to the traditional global minimum variance portfolio. Additionally, this methodology benefits of a graphical visualization of the selected portfolio directly over the graphic layout of the network, which helps in improving our understanding of the optimal strategy.

Keywords

Portfolio selection Networks Global minimum variance Dependence structure 

JEL Classification

G11 C6 

Notes

Acknowledgements

We would like to thank the anonymous referees for their careful reviews on an earlier version of this paper.

Supplementary material

10479_2019_3136_MOESM1_ESM.pdf (2.7 mb)
Supplementary material 1 (pdf 2735 KB)

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Copyright information

© Springer Science+Business Media, LLC, part of Springer Nature 2019

Authors and Affiliations

  1. 1.Dipartimento di Discipline Matematiche, Finanza Matematica ed EconometriaUniversità Cattolica del Sacro CuoreMilanoItaly
  2. 2.Dipartimento di Statistica e Metodi QuantitativiUniversità degli Studi di Milano - BicoccaMilanoItaly

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