In this article we deal with the problem of portfolio allocation by enhancing network theory tools. We propose the use of the correlation network dependence structure in constructing some well-known risk-based models in which the estimation of the correlation matrix is a building block in the portfolio optimization. We formulate and solve all these portfolio allocation problems using both the standard approach and the network-based approach. Moreover, in constructing the network-based portfolios we propose the use of three different estimators for the covariance matrix: the sample, the shrinkage toward constant correlation and the depth-based estimators. All the strategies under analysis are implemented on three high-dimensional portfolios having different characteristics. We find that the network-based portfolio consistently performs better and has lower risk compared to the corresponding standard portfolio in an out-of-sample perspective.

Clemente, G., Grassi, R., Hitaj, A. (2022). Smart network based portfolios. ANNALS OF OPERATIONS RESEARCH, 316(2), 1519-1541 [10.1007/s10479-022-04675-7].

Smart network based portfolios

Grassi, Rosanna;
2022

Abstract

In this article we deal with the problem of portfolio allocation by enhancing network theory tools. We propose the use of the correlation network dependence structure in constructing some well-known risk-based models in which the estimation of the correlation matrix is a building block in the portfolio optimization. We formulate and solve all these portfolio allocation problems using both the standard approach and the network-based approach. Moreover, in constructing the network-based portfolios we propose the use of three different estimators for the covariance matrix: the sample, the shrinkage toward constant correlation and the depth-based estimators. All the strategies under analysis are implemented on three high-dimensional portfolios having different characteristics. We find that the network-based portfolio consistently performs better and has lower risk compared to the corresponding standard portfolio in an out-of-sample perspective.
Articolo in rivista - Articolo scientifico
Dependence; Interconnectedness; Mean-variance; Networks; Portfolio optimization; Smart Beta strategies;
English
1519
1541
23
Clemente, G., Grassi, R., Hitaj, A. (2022). Smart network based portfolios. ANNALS OF OPERATIONS RESEARCH, 316(2), 1519-1541 [10.1007/s10479-022-04675-7].
Clemente, G; Grassi, R; Hitaj, A
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Utilizza questo identificativo per citare o creare un link a questo documento: https://hdl.handle.net/10281/366828
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