Dynamic asset trees and portfolio analysis

Jukka-Pekka Onnela, Anirban Chakraborti, Kimmo Kaski, Janos Kertesz

Research output: Contribution to journalArticleScientificpeer-review

125 Citations (Scopus)

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.
Original languageEnglish
Pages (from-to)285-288
JournalEuropean Physical Journal B
Volume30
Issue number3
DOIs
Publication statusPublished - 2002
MoE publication typeA1 Journal article-refereed

Fingerprint Dive into the research topics of 'Dynamic asset trees and portfolio analysis'. Together they form a unique fingerprint.

Cite this