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Portfolio management using graph centralities: Review and comparison

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  • Bahar Arslan
  • Vanni Noferini
  • Spyridon Vrontos

Abstract

We investigate an application of network centrality measures to portfolio optimization, by generalizing the method in [Pozzi, Di Matteo and Aste, \emph{Spread of risks across financial markets: better to invest in the peripheries}, Scientific Reports 3:1665, 2013], that however had significant limitations with respect to the state of the art in network theory. In this paper, we systematically compare many possible variants of the originally proposed method on S\&P 500 stocks. We use daily data from twenty-seven years as training set and their following year as test set. We thus select the best network-based methods according to different viewpoints including for instance the highest Sharpe Ratio and the highest expected return. We give emphasis in new centrality measures and we also conduct a thorough analysis, which reveals significantly stronger results compared to those with more traditional methods. According to our analysis, this graph-theoretical approach to investment can be used successfully by investors with different investment profiles leading to high risk-adjusted returns.

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  • Bahar Arslan & Vanni Noferini & Spyridon Vrontos, 2024. "Portfolio management using graph centralities: Review and comparison," Papers 2404.00187, arXiv.org.
    • Handle: RePEc:arx:papers:2404.00187
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    1. Victor DeMiguel & Lorenzo Garlappi & Raman Uppal, 2009. "Optimal Versus Naive Diversification: How Inefficient is the 1-N Portfolio Strategy?," The Review of Financial Studies, Society for Financial Studies, vol. 22(5), pages 1915-1953, May.
    2. 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.
    3. M. Tumminello & T. Di Matteo & T. Aste & R. N. Mantegna, 2007. "Correlation based networks of equity returns sampled at different time horizons," The European Physical Journal B: Condensed Matter and Complex Systems, Springer;EDP Sciences, vol. 55(2), pages 209-217, January.
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