Asset allocation: new evidence through network approaches

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 th...

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Bibliographic Details
Published in:Annals of operations research Vol. 299; no. 1-2; pp. 61 - 80
Main Authors: Clemente, Gian Paolo, Grassi, Rosanna, Hitaj, Asmerilda
Format: Journal Article
Language:English
Published: New York Springer US 01.04.2021
Springer
Springer Nature B.V
Subjects:
Allocation (Accounting)
Asset allocation
Assets (Accounting)
Business and Management
Combinatorics
Dependence
Financial markets
Management
Methods
Operations research
Operations Research/Decision Theory
Optimization
Portfolio management
S.I.: Recent Developments in Financial Modeling and Risk Management
Securities markets
Structure
Theory of Computation
Italy
Networks
Portfolio selection
C6
G11
Global minimum variance
Dependence structure
ISSN:0254-5330, 1572-9338
Online Access:Get full text
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Summary: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.
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ISSN:0254-5330
1572-9338
DOI:10.1007/s10479-019-03136-y