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Asset allocation: new evidence through network approaches

Author

Listed:
  • Gian Paolo Clemente

    (Università Cattolica del Sacro Cuore)

  • Rosanna Grassi

    (Università degli Studi di Milano - Bicocca)

  • Asmerilda Hitaj

    (Università degli Studi di Milano - Bicocca)

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.

Suggested Citation

  • Gian Paolo Clemente & Rosanna Grassi & Asmerilda Hitaj, 2021. "Asset allocation: new evidence through network approaches," Annals of Operations Research, Springer, vol. 299(1), pages 61-80, April.
    • Handle: RePEc:spr:annopr:v:299:y:2021:i:1:d:10.1007_s10479-019-03136-y
    DOI: 10.1007/s10479-019-03136-y
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    Cited by:

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    4. Herteliu, Claudiu & Levantesi, Susanna & Rotundo, Giulia, 2021. "Network analysis of pension funds investments," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 579(C).
    5. Fabio Vanni & Asmerilda Hitaj & Elisa Mastrogiacomo, 2024. "Enhancing Portfolio Allocation: A Random Matrix Theory Perspective," Mathematics, MDPI, vol. 12(9), pages 1-16, May.
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    7. Patel, Pankaj C. & Ojha, Divesh & Naskar, Shankar, 2022. "The effect of firm efficiency on firm performance: Evidence from the Domestic Production Activities Deduction Act," International Journal of Production Economics, Elsevier, vol. 253(C).
    8. Shreya Patki & Roy H. Kwon & Yuri Lawryshyn, 2024. "Centrality-Based Equal Risk Contribution Portfolio," Risks, MDPI, vol. 12(1), pages 1-17, January.

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    More about this item

    Keywords

    Portfolio selection; Networks; Global minimum variance; Dependence structure;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • C6 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling

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