Dynamic asset trees and portfolio analysis

By Jukka-Pekka Onnela, Anirban Chakraborti, Kimmo K. Kaski, J. Kertiész. 2002

198 citations recorded by the source corpus.

Abstract:The minimum spanning tree, based on the concept of ultrametricity, is constructed from the correlation matrix of stock returns and provides a meaningful economic taxonomy of the stock market. In order to study the dynamics of this asset tree we characterise it by its normalised length and by the mean occupation layer, as measured from an appropriately chosen centre called the `central node'. We show how the tree evolves over time, and how it shrinks strongly, in particular, during a stock market crisis. We then demonstrate that the assets of the optimal Markowitz portfolio lie practically at all times on the outskirts of the tree. We also show that the normalised tree length and the investment diversification potential are very strongly correlated.

Subfields: Economics and Econometrics, Finance

View Paper: https://www.semanticscholar.org/paper/d08e6e8497f217de0311079c482e0f3ef3c8181c

How researchers see this paper

The researchers whose trusted networks rank it highest, strongest advocate first. Every researcher gets a different order.

In Economics and Econometrics

In Finance

Citations in the corpus

Community detection in graphs (2009, background): “In early studies, scholars found clusters of correlated stocks by computing the maximum spanning tree of the network (Bonanno et al., 2003, 2000; Onnela et al., 2003, 2002) (Section A.1), and realized that such clusters match quite well the economic sectors of the stocks.”
Disrupted Modularity and Local Connectivity of Brain Functional Networks in Childhood-Onset Schizophrenia (2010, unknown): “…in Systems Neuroscience www.frontiersin.org October 2010 | Volume 4 | Article 147 | 13 global threshold to a correlation matrix have previously been documented in physics and economics, and several alternatives have been proposed (Onnela et al., 2002; Tumminello et al., 2005; Serrano et al., 2009).”
Degree stability of a minimum spanning tree of price return and volatility (2002, methodology): “ correlation coeﬃcient. The MST has been drawn by using the Pajek package for large network analysis http://vlado.fmf.uni-lj.si/pub/networks/pajek/ in [8,9] and it has also been recently addressed in [16,17]. In the present investigation we compute a MST for both volatility and price return for each”
Correlations between biofuels and related commodities before and during the food crisis: A taxonomy perspective (2012, background): “…exchange rates (Jang et al., 2011), import/export networks (Kantar et al., 2011), interest rates systems (Tabak et al., 2009), portfolio selection (Onnela et al., 2002) as well as commodities networks (Lucey et al., 2011; Tabak et al., 2010), yetmainly in the journals of interdisciplinary…”
Econophysics: Empirical facts and agent-based models (2009, unknown): “Economic taxonomy Mantegna’s idea of linking stocks in an ultrametric space was motivated a posteriori by the property of such a space to provide a meaningful economic taxonomy (Onnela et al. (2002)).”
The trees and the forest: Characterization of complex brain networks with minimum spanning trees. (2014, unknown): “Differences between MSTs of subsequent windows were quantified with a distance or dissimilarity measure D x,y of the MST (derived from the simpler survival rate described by Onnela et al., 2002).”