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arXiv · 1410.5621

Risk diversification: a study of persistence with a filtered correlation-network approach

Nicoló Musmeci·Tomaso Aste·Tiziana Di Matteo
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Abstract

The evolution with time of the correlation structure of equity returns is studied by means of a filtered network approach investigating persistences and recurrences and their implications for risk diversification strategies. We build dynamically Planar Maximally Filtered Graphs from the correlation structure over a rolling window and we study the persistence of the associated Directed Bubble Hierarchical Tree (DBHT) clustering structure. We observe that the DBHT clustering structure is quite stable during the early 2000' becoming gradually less persistent before the unfolding of the 2007-2008 crisis. The correlation structure eventually recovers persistence in the aftermath of the crisis settling up a new phase, distinct from the pre-cysts structure, where the market structure is less related to industrial sector activity. Notably, we observe that - presently - the correlation structure is loosing again persistence indicating the building-up of another, different, phase. Such dynamical changes in persistence and their occurrence at the unfolding of financial crises rises concerns about the effectiveness of correlation-based portfolio management tools for risk diversification.

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Nicoló Musmeci, Tomaso Aste, Tiziana Di Matteo. 2014-10-21. Risk diversification: a study of persistence with a filtered correlation-network approach. https://arxiv.org/abs/1410.5621

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