Network risk parity: graph theory-based portfolio construction
Article
Ciciretti, V. and Pallotta, A. 2024. Network risk parity: graph theory-based portfolio construction. Journal of Asset Management. 25 (2), pp. 136-146. https://doi.org/10.1057/s41260-023-00347-8
Type | Article |
---|---|
Title | Network risk parity: graph theory-based portfolio construction |
Authors | Ciciretti, V. and Pallotta, A. |
Abstract | This study presents network risk parity, a graph theory-based portfolio construction methodology that arises from a thoughtful critique of the clustering-based approach used by hierarchical risk parity. Advantages of network risk parity include: the ability to capture one-to-many relationships between securities, overcoming the one-to-one limitation; the capacity to leverage the mathematics of graph theory, which enables us, among other things, to demonstrate that the resulting portfolios is less concentrated than those obtained with mean-variance; and the ability to simplify the model specification by eliminating the dependency on the selection of a distance and linkage function. Performance-wise, due to a better representation of systematic risk within the minimum spanning tree, network risk parity outperforms hierarchical risk parity and other competing methods, especially as the number of portfolio constituents increases. |
Keywords | Portfolio construction; Graph theory; Hierarchical clustering; Eigenvalues |
Sustainable Development Goals | 9 Industry, innovation and infrastructure |
Middlesex University Theme | Creativity, Culture & Enterprise |
Publisher | Springer |
Journal | Journal of Asset Management |
ISSN | 1470-8272 |
Electronic | 1479-179X |
Publication dates | |
Online | 20 Feb 2024 |
Mar 2024 | |
Publication process dates | |
Submitted | 31 May 2023 |
Accepted | 11 Dec 2023 |
Deposited | 17 Jul 2024 |
Output status | Published |
Publisher's version | License File Access Level Open |
Copyright Statement | © The Author(s) 2024 |
Digital Object Identifier (DOI) | https://doi.org/10.1057/s41260-023-00347-8 |
Web of Science identifier | WOS:001168964900001 |
Related Output | |
Is supplemented by | https://link.springer.com/article/10.1057/s41260-023-00347-8#Sec14 |
Language | English |
https://repository.mdx.ac.uk/item/10443q
Download files
28
total views17
total downloads4
views this month0
downloads this month