Smart network based portfolios

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 studidell’Insubria

Annals of Operations Research, 2022, vol. 316, issue 2, No 35, 1519-1541

Abstract: 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.

Keywords: Portfolio optimization; Mean-variance; Smart Beta strategies; Networks; Dependence; Interconnectedness (search for similar items in EconPapers)
Date: 2022
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Citations: View citations in EconPapers (3)

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DOI: 10.1007/s10479-022-04675-7

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