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Asset allocation: new evidence through network approaches

Gian Paolo Clemente (), Rosanna Grassi () and Asmerilda Hitaj ()
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Gian Paolo Clemente: Università Cattolica del Sacro Cuore
Rosanna Grassi: Università degli Studi di Milano - Bicocca
Asmerilda Hitaj: Università degli Studi di Milano - Bicocca

Annals of Operations Research, 2021, vol. 299, issue 1, No 5, 80 pages

Abstract: 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 (search for similar items in EconPapers)
JEL-codes: C6 G11 (search for similar items in EconPapers)
Date: 2021
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DOI: 10.1007/s10479-019-03136-y

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