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Graphical Models for Financial Time Series and Portfolio Selection

Author

Listed:
  • Ni Zhan
  • Yijia Sun
  • Aman Jakhar
  • He Liu

Abstract

We examine a variety of graphical models to construct optimal portfolios. Graphical models such as PCA-KMeans, autoencoders, dynamic clustering, and structural learning can capture the time varying patterns in the covariance matrix and allow the creation of an optimal and robust portfolio. We compared the resulting portfolios from the different models with baseline methods. In many cases our graphical strategies generated steadily increasing returns with low risk and outgrew the S&P 500 index. This work suggests that graphical models can effectively learn the temporal dependencies in time series data and are proved useful in asset management.

Suggested Citation

  • Ni Zhan & Yijia Sun & Aman Jakhar & He Liu, 2021. "Graphical Models for Financial Time Series and Portfolio Selection," Papers 2101.09214, arXiv.org.
  • Handle: RePEc:arx:papers:2101.09214
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    References listed on IDEAS

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    1. Ledoit, Olivier & Wolf, Michael, 2003. "Improved estimation of the covariance matrix of stock returns with an application to portfolio selection," Journal of Empirical Finance, Elsevier, vol. 10(5), pages 603-621, December.
    2. Polson, Nicholas G & Tew, Bernard V, 2000. "Bayesian Portfolio Selection: An Empirical Analysis of the S&P 500 Index 1970-1996," Journal of Business & Economic Statistics, American Statistical Association, vol. 18(2), pages 164-173, April.
    3. Buser, Stephen A., 1977. "Mean-Variance Portfolio Selection with Either a Singular or Nonsingular Variance-Covariance Matrix," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 12(3), pages 347-361, September.
    4. Gu, Shihao & Kelly, Bryan & Xiu, Dacheng, 2021. "Autoencoder asset pricing models," Journal of Econometrics, Elsevier, vol. 222(1), pages 429-450.
    5. Makram Talih & Nicolas Hengartner, 2005. "Structural learning with time‐varying components: tracking the cross‐section of financial time series," Journal of the Royal Statistical Society Series B, Royal Statistical Society, vol. 67(3), pages 321-341, June.
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    Cited by:

    1. Chen, Ren-Raw & Zhang, Xiaohu, 2024. "From liquidity risk to systemic risk: A use of knowledge graph," Journal of Financial Stability, Elsevier, vol. 70(C).

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